Fixed IncomeJul 14 2014

“A bond is relatively simple – can they pay and will they pay?”

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Tim Haywood admits that when he tells people he graduated in chemical engineering, it is usually a “complete conversation stopper”.

But then the conversation quickly moves onto fund management and farming. For when Mr Haywood is not doing his day job – as head of fixed income at GAM, where he is responsible for the absolute return bond family of funds – he spends his time running a farm. Or, as he puts it: “You can only put a farmer’s son into the city for so long.”

Having decided upon a career in finance, he had something of a shaky start: his first day at ANZ Merchant Bank was ‘Black Monday’. It was also where he met Daniel Sheard, who went on to become his co-manager at GAM. Mr Haywood completed an MBA at Cranfield in 1991 and has specialised in fixed income ever since.

“There were aspects of fixed income that appealed more to my engineering mind,” he says, dismissing the view that equities are easier to grasp than bonds. “Actually, equities are more difficult to understand than bonds in many ways. You need to know what is the view of the chairman and what are the aims of the board and all sorts of social pressures. Whereas a bond is relatively simple – can they pay and will they pay?”

He continues: “What is unique about fixed income over the past 10 years is that the number of ways you can express yourself has changed. Now you can buy credit protection when 15 years ago buying credit protection was very difficult. You can buy options on currencies, you can dissect the yield curve into the very bit you want. In a way, that makes it more complicated than equities.

“While equities might be generically more complicated, because the number of factors that affect equities seem that much greater and therefore so much more difficult, the way you can express yourself in fixed income has become really quite manifold and that’s exciting.”

Mr Haywood took a job at Orient Overseas International in Hong Kong in 1994, where he remained until 1998 when, for family reasons, he returned to the UK. Back on these shores, Edward Dove, the then chief executive of Julius Baer Investments, and eventually president of Augustus Asset Managers, offered him a job at Julius Baer.

Since joining, GAM has boasted a stable team, with no fund manager having left the absolute return team in 10 years. “Partly it’s that our clients have been very loyal to a growing franchise so that’s been much appreciated,” he explains. “In the early years all we did was mandates and pension funds, which was fine – and then we moved into fund management in 2001 with the launch of the Emerging Markets Bond fund, then a series of hedge funds from the end of 2001 onwards.

“So we transformed from being a pure play pension fund manager through to being a fund manager. This was a time when most hedge funds came from Goldman Sachs or investment bank alumni; it’s quite strange to come from a pension fund route.”

The JB Absolute Return Bond fund, which Mr Haywood has run since its inception in 2004, and which is distributed by the GAM and Swiss & Global brands, has recently celebrated its 10-year anniversary and now has assets under management of ¤6.78bn (£5.38bn).

He remarks: “I think in 2004 we would have been very surprised that the Absolute Return Bond fund would have been our biggest product, that’s not what we expected.

“When we launch a product there are serious question marks about whether it will be popular. We think we can make it successful but it may be totally unpopular from a sales point of view.”

Augustus Asset Managers, meanwhile, was launched at the beginning of 2007 as part of a management buyout from Julius Baer Holdings in response to customer demand, according to Mr Haywood. He acknowledges that what may have seemed “a strange move” from outside the company was in fact done to preserve their client base, which he says had gone from wanting one style of parent company to another. They had moved from questioning why the fund management business was inside a Swiss private bank, to a buying community that required a strong balance sheet behind their fund manager. GAM later reacquired Augustus in May 2009.

“Not a single fund manager left during that process on the absolute return team, so it clearly worked at a product level and a staff level and assets have grown substantially,” he adds.

Over the years, it seems the firm has built up a reputation for longevity and loyalty among its managers. Mr Haywood agrees: “I think the conviction among the senior management around the fund managers they’ve hired remains very resilient and we’re grateful for that. It’s not [that you have] one bad quarter and people say you’re no good at your job.”

He notes: “That doesn’t mean we’re not adding to staff and refreshing the investment team. Once you’ve found someone who’s good, it’s best to keep them there, understand their really strong points and allocate capital around that rather than try to find someone new.”

He believes the company also benefits from the lack of a chief investment officer role. “Our fund is closed from time to time if the fund managers feel it is not appropriate to grow assets. It’s not growth for growth’s sake. Nor is it people telling you to be long the dollar even if you, as a fund manager, don’t believe that. That has been pretty integral to why the GAM investment platform has worked so well and has so many long-serving managers,” he observes.

Considering the current opportunities in fixed income, Mr Haywood says that from a “traditional point of view” the outlook might seem “grim”.

“Yields are low and ready to rise and yields rising means losing money as a long-only investor,” he notes. “Credit spreads are tight and almost uniformly tight, so there is not even a lot of difference between two credits.

“For these reasons the rather traditional way of investing may seem to be tricky in the future. The beauty of bonds, of course, is they have a terminal price. So for us, now we can deconstruct the world, we can be short as well as long and that’s very exciting. So currently the fund is increasingly short duration. We went into 2014 with positive duration and now we’re increasingly negative and increasingly bearish on Europe.”

He notes: “In credit, most people have made substantial money of late, particularly last year and this year by just being long credit. But can it continue in such a smooth, uninterrupted fashion? We suspect not.”

The fund is able to utilise credit protection, or “umbrellas”, which Mr Haywood says “allows us to run slightly riskier bond positions knowing we have this insurance against it”.

“So you can buy all sorts of umbrellas against strange market moves, which may not occur but if you’re wrong you’re not going to lose a lot of money,” he explains. “The good news for us is that all sorts of strange things can happen and we’ll do well. The bad news is that if nothing happens at all, we bought an umbrella when we didn’t need to buy an umbrella and we’ll look a little bit conservative.”

The next step for the fund manager is to grow the franchise internationally. Mr Haywood explains that it is already extending its reach to Australia and the US, where the concept of unconstrained fixed income is becoming increasingly popular.

While clearly excited at the prospect of establishing a global footprint for the funds, Mr Haywood remains focused on the reputation of the business within the UK. He says: “The markets have moved in a way to frustrate as many people as possible, but we’ve managed somehow to eke out a return and that’s what we’ll continue to do for the next 10 years.”

CV - TIM HAYWOOD

2009 – present Investment director and head of fixed income, GAM

1998 – 2009 Chief investment officer, then chief executive, Julius Baer Investments (later Augustus Asset Managers)

1994 – 1998 Chief investment officer, Orient Overseas International in Hong Kong