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Rathbones’ bond chief: This month we are entering the recession ‘danger period’

09 February 2024

The manager also explains trades that have paid off during the tumultuous past two years and why he has launched a new sustainable bond fund.

By Emma Wallis,

News editor, Trustnet

Sometimes experience is vital. When it comes to investing, many prefer to back people who have been around the block and seen it all before.

Bryn Jones, head of fixed income at Rathbones, fits that mould. He has been managing the £2.1bn Rathbone Ethical Bond fund for 20 years and has navigated the great financial crisis, the European sovereign debt crisis, Covid and the recent aggressive rate hiking cycle.

Throughout all of those challenges, the Ethical Bond fund has been a consistently strong performer, in no small part because its ethical screens have helped avoid poorly-governed issuers and corporate blow-ups. It is a top-quartile performer over one and five years within the IA Sterling Corporate Bond sector and is second quartile over three years.

Performance of fund vs sector over 10yrs

Source: FE Analytics

Jones and co-manager Stuart Chilvers spearheaded the launch of a new fund in November 2023, the Rathbone Greenbank Global Sustainable Bond fund, which has a global focus and a more nuanced interpretation of sustainability.

Here Jones explains trades that have paid off during the tumultuous past two years and how the new fund compares with its tried and tested stablemate.


Why should investors buy your fund?

The Rathbone Ethical Bond fund has delivered good, long-term, stable outperformance with ethical values. The fund focuses on UK corporate bonds and has negative and positive screens. Every asset must make a positive contribution to the environment or society, such as social housing bonds or wind farms.


How does the new sustainable strategy differ from the Ethical Bond funds?

The Rathbone Greenbank Global Sustainable Bond fund has a 70% benchmark allocation to global investment grade credit, 15% in high yield and 15% in government bonds.

It has negative and positive screens but they differ from the ethical fund, for instance the revenue thresholds in the negative screens are different.

Each holding must be linked to one of Rathbone Greenbank’s eight sustainable development themes (which in turn can be mapped to the United Nations’ Sustainable Development Goals), such as inclusive economies, resource efficiency and energy and climate.


What have been your best and worst decisions recently?

Our best move was the way we traded duration over the past 12 months. We bought duration when it was oversold and sold duration when it was overbought. When rates peaked, we started adding duration.

Not selling duration in December after an aggressive rally in rates was our worst decision. That was the only time last year when we didn’t execute a technical trade.

On the credit side, we played the financials space extremely well and made a lot of money last year from ‘discos’ – discounted perpetuals, which are legacy bank bonds.

The other thing we’ve done well is to avoid the blow-ups. In our view, Credit Suisse was poorly governed, Thames Water was highly geared and poorly governed, and we had no exposure to US regional banks.

The past couple of years have been a wild ride for bond markets and 2022 was particularly rough. How was the journey for you?

We have just seen the fastest rise in interest rates since two years after US independence, according to Jim Reid (Deutsche Bank’s head of global economics and thematic research).

In 2021 we outperformed and we de-risked the portfolio by reducing duration. Going into 2022, we thought inflation would rise and central banks would hike rates. We reduced cyclicality by selling bonds issued by property companies because we thought those businesses would underperform in a recession. We were underweight duration relative to our peers.

What we didn’t forecast was the Ukraine war. Oil went through the roof and inflation scores just went berserk.

People had excess savings, having hoarded cash through the Covid lockdowns and this cash was flowing into the economy. There were demand shocks and supply shocks and aggressive inflation.

In hindsight we should have reduced risk in 2022, we should have moved from BBB issuers up the capital structure, but if we’d done that we might have missed the year-end rally. 

We thought about hedging risk but the fund was making a 2.5% yield and it would have cost 2.5% – all our income – to hedge.

Credit spreads peaked in September 2022 with Trussonomics, then at the end of 2022 there was a rally in risk and we climbed back up the performance tables, finishing 2022 in the second quartile.

What we did get right was the fundamentals. Our companies went into 2023 very strong.

In 2022 some of the weakest performers were ‘discos’. They are floating rate so have no duration exposure and they are niche stories. We believed they would get taken out by the issuers but instead they just got marked lower. At the start of 2023, a number of discos we held were trading in the high 60s/low 70s and they were all called or had a call announced at par last year.

There was no reason for these bonds to suffer so aggressively in 2022 but we benefitted hugely in 2023. These are legacy latent value plays and when the story plays out they can be lucrative.

In 2023 the fund was up more than 10%. At the end of last year there was a huge rally in rates and risk which propelled the fund into the first quartile for 2023.  


How is your portfolio positioned for the year ahead?

We are sticking close to neutral and trading around that. Recessions tend to occur 23-36 months after the first rate hike so this month we are entering that danger period. There is a long variable lag to the rate hiking cycle and who knows whether we will get a hard or soft landing? There is a lot of uncertainty.

In the credit space, higher borrowing costs and interest expenses are likely to put pressure on earnings and will lead some companies to refinance. We are not taking too much credit risk at the long end of the curve. Most of our credit risk is in bonds with a maturity of less than 12-15 years.

We don’t want to be too underweight duration, however, because if the economy takes a turn for the worse then the long end will rally aggressively. We are also trying to reduce cyclicality, for instance by moving into systemically important banks. We are trying to construct a portfolio that will perform well in every possible macroeconomic scenario.


What do you do outside of fund management?

I run marathons and ultra marathons although I’m taking a step back this year and just doing a few 50 mile races.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.