Old Mutual Global Investors’ Christine Johnson has put on her “hard hat” after a tough year that prompted a reduction in her Monthly Income Bond fund’s exposure to high yield.
In the summer Ms Johnson held about 60 per cent of her fund in high yield and the rest in investment grade bonds. This has shifted to 50/50.
“It is time for hard hats mode,” she said. “At this point it is time to defend the fund and defend capital.”
So far in 2014, the £134m fund has underperformed its peers, with a bottom-quartile return of 2.9 per cent in the past year against an IMA Sterling Strategic Bond sector average of 5.4 per cent, according to data from FE Analytics.
The manager has delivered a third-quartile return of 23.9 per cent on the fund since she took it on in September 2010, the data provider said.
The drop in performance is due in part to Ms Johnson’s large allocation to high yield bonds, an asset class that has struggled in recent months.
As well as now moving towards investment grade, she is running a reduced duration strategy, which is a measure of a fund’s sensitivity to interest rate rises.
The modified duration at the end of August was 4.6 years, according to the fund’s factsheet.
The defensive strategy will make her very selective to new issues, which she expects to be rampant at the beginning of the year. “There is a queue of stuff waiting to be issued,” she said. “Plus once the asset quality review [of European banks’ balance sheets] results come out, second and third-tier European banks will flood the market.”
The results of this comprehensive banking review will be released by the European Central Bank on October 26. They are expected to give a stamp of approval to less well-regarded banks such as Banco Popolare di Vicenza.
However, Ms Johnson is not keen on these bonds. “The road to recovery in Europe is not really fixed and I would be wary of banks that are at the bottom of the capital structure,” she said.
Elsewhere, Ms Johnson’s workload has grown a bit heavier. In addition to managing the Monthly Bond Income fund and the Corporate Bond fund, she will co-manage the recently launched Old Mutual Monthly Income High Yield Bond fund.
Formally launched on September 26, it already has £79m assets under management.
Despite the current difficulties in the high yield market, Ms Johnson and her co-manager Bastian Wagner think the time is ripe to invest, as a new middle market is developing.
At a roundtable this month, Mr Wagner said: “There is an emergence of a middle market in high yield. New names are entering the European high yield market and this allows us to diversify away from the dollar market.”
One such company is Bibby Offshore, the sub-sea services provider to the oil & gas industry, which launched its debut bond, a 7.5 per cent June 2021 note.
Overall, the new fund has about 60 per cent of its portfolio in Europe and 40 per cent in the US. This compares to the Bank of America Merrill Lynch Global High Yield index average of 20 per cent in Europe and 80 per cent in the US.
