Liontrust’s Michael Mabbutt has suffered a torrid start on his Global Strategic Bond fund after poor performance and mass outflows.
It was the firm’s first foray back into fixed income funds following the sale of its credit team to Avoca Capital in 2011, and it marked Mr Mabbutt’s return to fund management after five years.
Liontrust launched the Dublin-domiciled Global Strategic Bond fund in February 2013 after hiring Mr Mabbutt and co-manager Felix Martin. The fund managed to raise a significant amount of money in 2013, as investors bought into Mr Mabbutt’s process and track record at Thames River, LGT Asset Management and Baring Asset Management.
Star fund selector John Chatfeild-Roberts was one of the major early backers of the fund, building up a position in his Jupiter Merlin Income and Jupiter Merlin Conservative funds.
But the fund struggled in 2013 and reached the end of December having lost investors in the sterling-hedged share class 8.2 per cent, according to data from FE Analytics.
In contrast, the average fund in the IMA Sterling Strategic Bond sector had gained 2.9 per cent in the same period.
However, while the fund was originally in that sector, it was moved to the Unclassified peer group because Liontrust thought the Strategic Bond sector did not provide an accurate comparison for the fund.
The performance led many investors, including Mr Chatfeild-Roberts, to sell out of the fund.
Between the end of September 2013 and the end of February 2014, the size of the fund collapsed by more than 85 per cent, dropping from $640m (£392m) to $91.3m as money was pulled out.
The size of the fund has since declined further, to $73.4m at the end of August, even though performance has turned positive.
In its first full year, the fund lost 9.6 per cent, but it has since stopped the rot by delivering a gain of 3 per cent since February 6 2014. This was slightly less than the 4.2 per cent average return from funds in the IMA Sterling Strategic Bond sector.
Mr Martin said: “Obviously we were not happy with the performance in 2013.
“When we launched the product, it was almost the complete opposite of perfect timing to launch a bond fund.”
The fund was launched just before the mass sell-off sparked by then US Federal Reserve chairman Ben Bernanke’s comments about ending quantitative easing.
Mr Martin said the fund’s positioning meant it was particularly badly hit, given that it had significant exposure to emerging market debt, which bore the brunt of the sell-off.
The fund also had a large short position on corporate high yield bonds because the managers thought the sector was expensive and were looking to make money as and when it sold off.
But the high-yield sector held up better than other forms of bonds through the sell-off, continuing to rally afterwards, and Mr Martin said the trade had been “painful”.
Mr Martin said he stood by the decision, and his conviction in the short high-yield position has grown as the sector has continued to rally.
The manager said he “[does] not regret [the position] in strategic terms, though I do regret the poor performance”.
Co-manager Martin explains why accepting a big client was a risk
One of the reasons why the size of the Liontrust Global Strategic Bond fund has shrunk so significantly is down to one major client pulling out at the start of 2014.
Felix Martin explained the client had been a big supporter of Michael Mabbutt from his time at Thames River and wanted to back the new fund at launch.
For Mr Martin and Mr Mabbutt, it was a dilemma whether to say yes or no. “We ummed and aahed about it,” Mr Martin explained.
“We thought it was going to be a tough beginning [raising assets on the fund], with Michael Mabbutt coming back from five years away and being at a firm with not a big history in fixed income.”
For the co-managers, the large amount of money offered by this client was a “nice allocation” but also a “risk”. Mr Martin said: “It is a risk when you have a very dominant investor but they were keen to come into the fund.”
In the end, the duo accepted the money, but Mr Martin revealed the client then decided to withdraw its money in the first two months of the year because it was keen to reduce emerging market exposure and the fund had large emerging market debt positions.
Mr Martin said for the Liontrust duo, “that [dominant investor] risk came to pass”, and the fund size plummeted.
However, Mr Martin said flows had begun to turn positive recently and the fund has had a “very nice inflow” from a large client, which he said was a “significant” moment for the team.
