The £508.12m fund is co-managed by Torcail Stewart and Stephen Rodger.
Its aim is to produce a high level of monthly income “through investing in mainly investment grade and high yield bonds issued by companies worldwide”, says Mr Stewart.
“A key part of the process is that it is primarily [based on] bottom-up stock selection and we also take high active positions, so you’ll see that 2-3 per cent position sizes are not uncommon in this fund.”
Ideas for the portfolio are generated in a number of ways, with the managers and their team attending conferences and setting up company meetings. Mr Stewart says: “Normally about a quarter or a third of the purchases we make for the fund are in the new issue market – sometimes we do find some quite attractive companies in that new issue market. We also share research and are in quite close contact with our equity colleagues.”
A key part of the process is a sector valuation screen. “Each of our analysts and managers undertakes a screen of the sectors that they cover, and what’s quite good in the credit market is you can readily identify if a bond is cheap or not. In equity markets, you have to look at the p/e [price to earnings] ratio and that takes a lot of assumptions to generate what the earnings per share will be going forward, whereas in credit markets you just look at the spread. So the spread immediately identifies that the bond is cheap for its given rating category.”
Managers also pay attention to what Mr Stewart calls “credit milestones”, monitored weekly for each of the companies they lend to. “That, in effect, is where we’re setting out how we expect the company to perform going forward, what are the positive milestones to see the balance sheet is improving and, equally, what are the warning signals we should be looking out for.”
Some of the largest positions are presented to the entire equity team. “You get quite a lot of questions from the partners. In effect, you’re able to give some of your larger positions a good kicking from senior people in the firm. Usually that’s quite a good way of confirming whether or not you want to increase your conviction or potentially reduce.”
The B share class, which is the clean retail share class for the fund, has ongoing charges of 0.53 per cent and ranks at level four on a risk and reward scale.
The fund has notched up several years of long-term outperformance, placing it top quartile in the Investment Association Sterling Strategic Bond sector. According to FE Analytics, in the 10 years to May 21 the portfolio delivered 76.55 per cent against the sector’s average of 56.27 per cent.
Mr Stewart says: “Generally we’ve found in most years that stock selection is an important contributor to performance. So about half of the fund is traditionally in credits where we see balance sheets improving with time... We would hope to see the spreads compressing with time, in that respect. [The other] half are in the compounding category – those that are grinding out good yield for you. So it’s a mixture of those two that have contributed to performance.”
In June last year, the manager began switching out of single B-rated bonds into higher-rated credits as he had some doubts about valuations. Since the start of this year, he has been adding back into high yield again as valuations began to look more attractive. Now, he adds, roughly 40 per cent of the portfolio is in high yield credit.
One holding the manager liked in the past year was the Daily Mail & General Trust, which saw its credit rating slashed in 2009 at the height of the financial crisis, when most of its sales were through advertising spend. Mr Stewart explains: “Over time it has transitioned such that the majority of its sales are coming from non-newspaper-related businesses.
“So we took quite a large position in the longest-dated bonds we could find. We felt this is a much stronger business than it was back in 2009. For example, it disposed of a large portion of its regional newspaper business as well, which was particularly badly hit.”
He adds: “We thought that with time, this is probably going to get upgraded, and lo and behold, it did. So we did see a decent amount of return on that bond.”
EXPERT VIEW
Jon Beckett, UK research lead, association of professional fund investors
The team has good rating agency coverage including Square Mile and a tier 1 rating from FundHouse. At £500m, the fund is a useful size, big enough to buy into a range of placings, small enough to not completely run aground when market liquidity shallows. It is nicely spread across 60-80 issues rather than some of the multi-hundred issue portfolios that typify many a supertanker in this space. Performance has been convincing, maturity spread in the top 10 is between four and 20 years and affords the team a nice roll-off profile with a coupon between 4 and 7 per cent per annum. The fund’s largest weights are in insurance issues and asset-backed. Overall, the portfolio appears to be nicely diversified.
