o Anna Lees-Jones, manager of the M&G Corporate Bond Fund, puts the fund’s success down to its research resources. She has access to the group’s 28 different credit analysts, all of whom are career analysts, having worked in the industry for at least 10 years. “That’s a huge advantage to me,” says Lees-Jones.
The fund has particularly broad diversification, holding more than 120 credits in its £1,317m portfolio. Analysts will have seen each of the issuing companies within the last year. “And because of the size and importance of our fund, they’ll come to us,” says Lees-Jones.
M&G’s corporate bond fund is primarily aimed at the retail sector but it attracts significant levels of investment from the institutional side too. Its official aim is to achieve higher returns than available through government bonds, by investing in sterling-denominated fixed and variable rate securities including corporate bonds and debentures issued by companies and other institutions.
Among its top holdings are BT, with 2.7% and retailer J Sainsbury with 2.0%. Its gross distribution yield is 5.70% while the gross redemption yield is 5.40%
Right now, it is the BBB and AA rated notes that offer the best risk/return ratios, says Lees-Jones. “There’s a lot of fear built into the market,” she says. This is where research is key. “The default rate has peaked, but there are still surprises,” she says.
o Launched nearly 13 years ago, the Morgan Stanley US High Yield Strategy is run by portfolio manager Stephen Esser. The investment process used by the fund, says Morgan Stanley, focuses almost exclusively on a case-by-case analysis of individual bonds. The sector and geographical allocation just happens as a result of this bottom-up approach.
It is this bottom-up method together with the house’s focus on credit analysis and its global perspective that Morgan Stanley sees as the three consistent themes which have guided the high-yield strategy right from the beginning.
“Unlike many high-yield investors, we believe that portfolios should be exposed to investment opportunities in all developed and emerging markets to find the best possible investments,” the firm says.
The goal of the investment process is to make a diversified portfolio of undervalued bonds from issuers, which the managers believe have sustainable competitive advantages. In practice, this is done by screening the investable universe of 1,300 companies.
At the end of last October, the majority of the fund’s holdings were in the five-10-year maturity sector, with these accounting for 72.95% of the fund. The fund held 224 securities.
o The Aberdeen International High Yield Bond Fund is one of the few offshore high yield corporate bond funds that has multi-currency exposure, says Rod Davidson, head of fixed interest at Aberdeen Asset Management. This offers investors a type of diversification not easy to come by in the sector.
“The majority of offshore bond funds focus on government bonds either developed economies or emerging markets or focus on one high-yield market be it US or Europe,” he says.
Anyone dipping into the high-yield corporate bond market has lost capital over the last two years. Aberdeen says it has tried to mitigate this downside risk by investing in a blend of investment grade and non-investment grade corporate bonds. On top of this, says Davidson, Aberdeen’s corporate bond managers run diversified portfolios of over 100 holdings.
Over the last three years, the fund has suffered a negative return, including reinvestment of gross income, of 21.8%, a slimmer loss than the 37.7% shown by the JP Morgan Euro High Yield Index. The figures do not include sales charges. The investment process is mostly bottom-up – focusing on individual credit analysis. “Aberdeen employs five credit analysts who purely focus on high yield corporates,” says Davidson.
o The Invesco Sterling Bond Fund – according to its official objective – aims to invest at least 50% of its assets in instruments denominated in sterling. This leaves it free to invest in notes issued by corporations in any part of the world, and it could in theory hold up to half of its assets in emerging markets or non-investment grade securities.
But in practice, this percentage is likely to be 25% or less, the fund states. “It has a fairly flexible mandate,” says Paul Causer, who manages the fund in Henley in the UK, along with Paul Read. “It’s a sterling bond fund, but within that it has some freedom to do other things.” The fund could, for example, hold a large amount in gilts if market and economic conditions seemed to warrant this, he says.
“It is not a one-concept, one-theme fund. We’re really trying to work the portfolio to get as much out of it as we can,” he says. The managers are prepared to tolerate the odd quarter of bad performance for the sake of an improvement in overall performance, he says.
Within the last half year, the fund made quite a play of bonds issued by telecommunications companies. It was a big sector bet which paid off, says Causer. Even now, 21% of the fund is invested in telecoms debt.
A top holding at one point was BT 8.875% dollar bonds which mature in 2030, which at the time accounted for 3.6% of the whole portfolio. Causer points out that any bond investments in foreign currency are hedged back to sterling. The current yield for the accumulation units of the fund is 6.56%. Over the last five years, the cumulative performance of the A shares has been 50.20%.
o The Dublin-based PIMCO Global Bond Fund is a fixed income fund that is not restricted to government bonds or corporates. Instead it uses a mix of government bonds, asset-backed and mortgage-backed notes.
As a house specialising in fixed income, with $300bn in fixed income assets under management, the fund has access to in-depth information on the investment sector. “We have an advantage in terms of resources,” says Joe McDevitt, head of PIMCO Europe. “On that scale, we can apply resources to all the funds. We can identify the best ideas from the whole range of sectors and ensure they get in the portfolio.”
The investment process, he says, is a combination of top-down and bottom-up. PIMCO’s global investment committee, headed by Bill Gross, is responsible for sourcing top-down, macroeconomic ideas. A model portfolio is created which reflects those strategies and ideas, which the fund then uses that as a blueprint to structure the portfolio.
The $481m (E480m) fund, which was born nearly five years ago in March 1998, has achieved returns, which have tallied closely with its benchmark, the Lehman Brothers Global Aggregate Index (Hedged). The annualised return over the last three years is 8.44%, against the Lehman index at 8.38%.
“We can include in the fund on a tactical basis strategies which are outside the index,” says McDevitt. For example, the fund keeps a modest exposure to emerging markets debt, which it sees as an attractive source of yield in the future. In terms of duration-weighted exposure, 61% of the fund is invested in the EMU area, with 35% in the US.
o For all its advantages, a perceived lack of clarity has kept some outsiders away from the Swiss franc bond market. Knowledge is key, and this is where Credit Suisse Asset Management says its Credit Suisse Swiss Franc Bond Fund has the edge.
“As a leading market player with proven specialists and experienced portfolio managers, CSAM has in-depth knowledge of the partially intransparent Swiss Franc Bond market,” the managers say.
Because the market it operates in is also quite illiquid, the fund says a greater emphasis is placed on diversification, with the number of holdings typically exceeding 100.
The fund is referenced to the Swiss Bond Index (SBI Foreign) and tracking error is conservatively managed within a target +/-1% of this. The credit quality of the portfolio is high. Eligible investments are required to have a single A rating or better.
As an important participant in the corporate bond market, CSAM says it is well placed to determine trends within the new issues market.
The investment process for all of CSAM’s funds start with its monthly ‘Global Themes Meeting’. This is when fixed income specialists from all its offices get together to discuss current and future global trends and developments in the market, using a top-down approach.
o The T Rowe Price Global Aggregate Strategy actively manages a portfolio of global bonds and currencies. object is to add around 100 to 125 basis points of outperformance a year with a total tracking error of 400 basis points. Michael Simcock, portfolio manager, says: “Our performance since inception of the fund in April 2000 is 45 basis points per annum outperformance.”
The portfolio is run from London with support from T Rowe Price’s Baltimore headquarters. The London team comprises four portfolio managers, two credit analysts traders fixed income and currency. Baltimore adds 10 credit analysts, primarily focusing on the US market, a global high yield team, plus asset backed, emerging markets and treasuries specialists.
“This is the one product we have that tries to draw down on all the global resources of T Rowe,” says Simcock. “Essentially half the product is run out of Baltimore. The relative weighting of corporates to Treasuries, the securities selection of credit portfolio and indeed the entire running of the US$ segment of the portfolio is all done out of Baltimore.”
The strategy, benchmarked, against the Lehman Global Aggregate index, aims to capitalise on unrecognised conditions in smaller markets and unanticipated credit opportunities. “We want to be able to move in and out of smaller markets which we think offer mainly under-researched and overlooked valuation opportunities. On top of that we also attempt to utilise value of research that is done out of Baltimore, specifically in high yield.”
Currency offers off-index opportunities. “Our philosophy tends to be to try to keep bets on major currency limited fairly limited. For us the opportunities are to be found in the less-researched markets such as Indonesia where we will have a long opposition in the rupiah, and China where slightly we have a long position in the Chinese renminbi.