A lack of liquidity in the UK corporate bond market has led Standard Life Investment’s Bambos Hambi to make his fourth major portfolio change in just over seven years.
Hambi, Standard Life’s head of fund of funds, has significantly reduced his exposure to the asset class and is instead introducing global bonds hedged back to sterling across his portfolios.
General concerns for UK credit, combined with the fact his team now runs more than £12bn in assets, has led Hambi to broaden the number of assets he has available to maximise the liquidity of his portfolios.
Performance of index over 5yrs
Source: FE Analytics
“We are concerned now that, when trading either tactically or making strategic changes, we’re impacting fund managers’ portfolios to a greater extent,” the manager (pictured) reasoned. “We are concerned about liquidity in the corporate bond market, as has been the regulator, as are a number of fund managers in that space who we meet and discuss these issues with.
“So, we decided to introduce global corporate bonds alongside our UK corporate bonds.”
Hambi said it was particularly important that his exposure to global corporates is hedged back to sterling, so that his clients take no currency risk within their defensive asset class exposure.
He said there were several reasons to increase exposure to global credit at the expense of UK corporates.
“Firstly, you have greater diversity, so you go from a market in the UK corporate bond space of roughly £300bn, to – once you include global corporate bonds hedged back to sterling – a universe of £2.7trn.
“You move from a number of issuers of around 350 to 2,500. Meanwhile, your duration goes down from 8 to 6.5 years and, in your yield to maturity, you get a small pick-up from 2.4 to 2.5 [per cent].
“So, four boxes are ticked. You get an improvement in your yield, an improvement in your risk profile, you get diversification and, very importantly for our clients, we get much, much better liquidity.”
The manager has a total of six new holdings across his portfolios within the global corporate bond sector. Four of these are either brand new funds or brand new share classes, which the team at Standard Life Investments is seeding.
For instance, he has worked closely with Vanguard to launch both a global corporate bond and a global short-term corporate bond fund.
“We have a great relationship with Vanguard and we believe this is an asset class that will gain a lot of traction and will be diluted,” Hambi said.
“On day one, we will own 100 per cent of those. Within a year we want to own below 50 per cent and Vanguard are very keen and aware that they will get our ownership down to below this.”
Within the manager’s Managed I, II and III funds, he has seeded a Standard Life Investments short duration global corporate bond fund, which will sit alongside an existing exposure to the five FE Crown-rated Standard Life Investments Global Corporate Bond fund.
“We have been concerned about valuations in the fixed interest space and a long-term solution for us is having a lot of money in short-duration vehicles to reduce the downside for our clients, to reduce volatility and to protect assets,” the manager explained.
Finally, within his MyFolio Multi-Manager range, he has added exposure to existing holding Robeco Global Credit, as well as seeding a new short maturity fund launched by the asset management firm.
“We rate Robeco very highly. They are a Dutch asset manager and one of the largest in the world,” Hambi explained.
“We are at the forefront of getting a lot of groups to launch short maturity funds, as we did in the UK. We seeded five or six short duration funds in the UK corporate bond space over the last few years.
“By seeding new funds you obviously get very good returns for your clients. We have, within the mandate, a say in how the funds are designed.
“It’s very powerful, we do utilise our clients’ assets to make sure that we continue to be on the front foot and are positioning ourselves correctly for the future.”
Elsewhere within the MyFolio Multi-Manager range, Hambi has doubled his exposure to absolute return bond funds.
He has done so through a new position in the SW Payden & Rygel Absolute Return Bond fund, which is domiciled in Ireland and has assets under management of $1.6bn. Since its launch in 2014, it has returned 12.14 per cent compared to its average peer’s return of 16.69 per cent.
Performance of fund vs sector since launch
Source: FE Analytics
“[Payden & Rygel] is a US asset manager; it has a huge amount of assets mainly from institutions in America,” Hambi explained.
“They are a boutique in fixed income, they are a specialist in fixed income and they have a 10 year-plus track record. We met the managers a number of times before we put any money with them.”
Other changes the manager has made include reducing the portfolios’ exposure to UK commercial property funds to maximise liquidity.
Instead, he has increased his exposure to closed-ended global real estate investment trusts (or Reits) which have been hedged back to sterling, again to minimise currency risk.
“In the [MyFolio] Market range, we are buying the Amundi Global Tracker and we are seeding a new hedged share class,” Hambi explained. “It has a long-term track record but it’s not hedged back to sterling so we are seeding a brand new share class.
“In the [MyFolio] Managed range, there is the Standard Life Investments Global Reit fund which is up and running and, alongside that, we are going to be running the Amundi [Index FTSE EPRA/NAREIT Global tracker] fund.
“We won’t own any more than 50 per cent of any Standard Life Investments fund and we have a lot of money going into global Reits, so we are working alongside Amundi with Standard Life Investments in the Managed range.”
Within the MyFolio Multi-Manager range, the manager is using Brookfield US Real Estate for exposure to property.
“They are a US property specialist. They’re behind a lot of the big office developments in London and they’re renowned as a property manager,” he continued. “They actually have $220bn in physical property, $15bn of which is in real estate investment trusts.”
Meanwhile, Hambi is reducing his exposure to global high-yield bond funds, partially as a result of his increased exposure to global corporates. He has also slightly increased his exposure to local currency-denominated emerging market debt.
“Those are our major changes, it’s involving a few hundred trades for us at the moment and there is quite a lot of money moving around,” he concluded.
“The major changes to strategic asset allocation compared to previous years has predominantly been among the defensive asset classes.”
Over the last five years, Hambi has returned an average of 40.65 per cent compared with his peer group composite’s average gain of 47.49 per cent.
Performance of manager vs peer group composite over 5yrs
Source: FE Analytics
However, he has done so with a lower annualised volatility, maximum drawdown (which measures the most money lost if bought and sold at the worst possible times) and downside risk ratio (which predicts susceptibility to lose money during falling markets) compared with his average peers.
His largest fund, the £3.3bn Standard Life Investments MyFolio Managed III, has a clean ongoing charges figure (OCF) of 1.01 per cent.