However, during the same period, the fund has outperformed the IMA Sterling High Yield Sector, and is also the second best performing fund within the sterling high yield sector.
Performance of Cazenove Strategic Bond over the last 12 months
Source: Financial Express Analytics
Top five sterling high yield funds
| Name | ly (%) |
| Fidelity Sterling Core Plus Bond | -4.1 |
| Cazenove Strategic Bond | -6.7 |
| Scot Wid High Income Bond | -9.7 |
| Stan Life Inv Higher Income | -13.6 |
| Schroder Monthly High Income | -14.0 |
Source: Trustnet.com
In addition, Peter Harvey’s own record as a Trustnet Alpha Manager would appear to suggest that fund performance will improve in future.
According to the Alpha Manager Ratings, Harvey has outperformed his peer group in four out of the past nine years, in both rising and falling markets.
He has managed to outperform peers in two out of seven years of rising markets, and two out of two years of falling markets. The outcome for investors is clear, according to the Trustnet data, across the entire period in which Harvey has been in charge of funds, investors would have earned an average return annually of 1.3 per cent - even taking into consideration years when the markets overall were falling.
Harvey v Peers
Source: Trustnet Alpha Manager Ratings
Trustnet recently met up with Peter Harvey, and started by asking him to explain his asset allocation approach.
A: We see asset allocation in terms of sectors, deciding if we want to be overweight in banks, automotives or other commercial sectors. It is part of the process but it is not the largest part of the process. The overwhelming proportion of our time is spent in analysing companies’ bottom-up stock selection.
Asset allocation is driven by macro-economic factors, credit fundamentals – in other words is this an over-leveraged or under-leveraged sector – and technical factors, such as are there a large number of competitors selling this type of paper or buying it – and finally relative value. These are the drivers and that will decide whether we want to be in perpetual bank paper, or consumer non-cyclicals, for example.
Q: How do you explain the outperformance in the past year?
A: Clearly it has only outperformed versus competitors in the sector and the absolute returns have been pedestrian, and for most credit products it has been horribly negative. The reason we have not been sucked into highly negative performance is mainly the avoidance of perpetual bank capital. That has been a real killer blow for a lot of our peers; the fact that they were buying what effectively is equity as a bond. These are called various things such as Tier One hybrid bonds or subordinated Upper Tier Two bonds. They have a thousand different names but ultimately they are right at the bottom of the capital structure, and it has been particularly painful for some of our competitors.
Q: What have been the drivers of portfolio performance?
A: (Peter Harvey pictured right) Our positions have focussed heavily on the crossover point between investment grade and high yield; those companies that sit on the borderline between BBB – which is the bottom of the investment grade – and BB, which it the top end of high yield. Most of our competitors have tended to focus on one end or the other of that rating spectrum. That is really just cash with a hat on. That is savings in my view, not investment. While at the bottom end of the ratings spectrum there is highly speculative distressed debt. That is not really our game. It is an attractive and interesting part of the market but it is not our core business. Our competence is in that middle ground - BBB and BB – which includes companies such as Cable and Wireless, Rio Tinto, Royal Sun Alliance, Vedanta, Heineken, Domeq. These are ordinary companies – not as safe as Unilever, and not as dangerous as buying GM. That explains the majority of our performance over the last couple of years: our focus in the middle ground and we have over half of the fund invested in that territory. Q: Half of the fund’s portfolio is in BB (30.5 per cent) and BBB (19.5 per cent) rated securities (as of 28 February). What is the thinking behind investing so heavily in BB and BBB securities?
A: It is about the optimum point in the capital structure for both companies and investors. From the perspective of companies, it is about taking on as much debt as possible without de-stabilising the company. Beyond that point –lower than BB – there is a danger of de-stabilising the company as GM and Ford have demonstrated. From the investor’s perspective, our clients are seeking to capture as much of the high yield from non-investment grade debt as they can without taking all of the risk.
Q: The fund gets some of its market exposure via derivatives. How illiquid is that market at present and does that affect your strategy?
A: We have a modest exposure to credit default swaps. They represent less than 20 per cent of the net asset value of the fund so it is not a significant driver. For us it is a straight alternative to buying the bond. You can use a credit default swap almost exactly the same way as you can use a corporate bond.
If, for example, you are exposed to Glaxo or BP through the corporate bond it generates the same return as if you were exposed to it through CDFs – so why wouldn’t you use both tools? It is significantly more liquid than corporate bonds. The bid off the spread is much lower. Credit default swaps are far more actively traded with massive volume amounting to billions a day, whereas with corporate bonds some names we own like Cable and Wireless or Rio Tinto might not trade in a week.
Q: How do manage risk?
A: Our whole credit process is about managing risk. It is not something we just tack on at the end. Some investment managers will have an investment process and then a slide at the end that says ‘risk control.’ For us the vast majority of our time is spent looking at corporate credit risk. To do that we assign proprietary rating to every company we invest in below ‘A’ and many more that we don’t invest in. That means we have our own rating process, which is based on an analysis of business risk –financial risk and an assessment of the management risk of that company – and we evaluate that management team.
Central to our risk management process is the knowledge that we have a credit rating which is totally independent and totally driven by Cazenove Capital.