The FE Alpha Manager has cut back his exposure to corporate bond funds, particularly those with a focus on high yield, as well as UK and global equity income strategies.
“Most of what I’ve done has been driven by valuations,” he said. “The spreads in high yield and investment grade debt have moved in to such an extent, that we no longer see much value.”
“In the corporate bond sector, the average fund has a credit rating of between A to BBB. Managers have had to go lower down the quality to find value, but now even this area is looking stretched.”
“This high yield risk is not looking as attractive to us as it once did, and we’ve cut back our exposure.”
“It seems to me that the high yield surge we’ve seen is the last leg of a rampant bull market in credit. If there is more quantitative easing (QE), perhaps yields could come down a bit further, but there’s limited upside at this point.”
Coombs has taken profits from the Kames High Yield Bond fund across the Rathbone Strategic Bond, Multi Asset Strategic Growth and Multi Asset Total Return portfolios. He’s also cut back his exposure to Stephen Snowden’s Kames Investment Grade Bond fund.
“This is no reflection of [Philip] Milburn, we just see better opportunities elsewhere,” said Coombs. “We’ve reduced our position in the High Yield fund quite a lot, and have very little left.”
“We still quite like convertibles, which we hold through the RWC Global Convertibles fund, but we’ve taken all our duration risk out of high yield. The only significant exposure we have now is through the Neuberger Short Duration High Yield fund.
Coombs has split the money he’s taken out of corporate bonds between equities and government debt – two areas which he believes are underestimated by the market.
“The Total Return fund has increased its exposure to gilts, and we’re in the process of upping our exposure to equities as well,” he said. “Not in conventional equity income, which we also think looks stretched, but in growth.”
“We’ve been selling out of [Neil Woodford's] Edinburgh Investment Trust, for example. It’s been trading on a premium of between 5 and 7.5 per cent recently, which we’ve taken as an opportunity to sell.”
“We’ve gone into a Pimco Equity Income fund, which despite the name is on a discount. It’s a low beta play, but has more flexibility than the average [equity income fund].”
“Kiltearn Global Values is another one we’re looking at in the Total Return and Strategic Growth funds; we just have to wait for it to be signed off.”
“We’ve had the most extreme move in the Enhanced Growth fund, where we’ve added BlackRock Gold & General.”
Coombs says he no longer has any exposure to equity income in Rathbone Multi Asset Enhanced Growth, and has brought down his weighting to UK equity income in the Total Return portfolio from 12 per cent to 6.5 per cent in the last two weeks.
Performance of manager versus peer group composite since June 2009
Source: FE Analytics
Coombs has returned 29.43 per cent since he started running portfolios in June 2009, compared to 7.93 per cent from his peer group composite.
It’s difficult to measure the performance of Coombs’ Strategic Growth and Total Return portfolios, because they don’t have a benchmark and sit in the IMA Unclassified sector.
Since their launch in June 2009, they’ve returned 15.48 and 13.78 per cent respectively. The Enhanced Growth fund has lost 0.63 per cent since launch, beating its composite benchmark – split 70/30 between the MSCI World and MSCI Emerging Market indices – by 1.54 per cent, with less volatility.
The Strategic Bond fund, which Coombs manages with bond-specialist Bryn Jones, was only launched in October last year. It’s made a decent start, performing in line with its IMA Sterling Strategic Bond sector with less volatility.
While Coombs points to valuations as his biggest motivation for overhauling the portfolios, he says improving conditions in the eurozone and the US have made him more comfortable in upping equity risk.
"Europe is a bit more stable following [Mario] Draghi's comments and actions, and it doesn't look like the situation will get any worse in the short-term as a result," he said. "US numbers also look a bit stronger, which makes me feel a little more assured."