James Tomlins has managed this £547m fund since launch in September 2014 and is assisted by deputy Stefan Isaacs.
Mr Tomlins explains: “The fund is designed to provide an attractive level of income, along with a natural hedge against rising interest rates, by investing mainly in high-yield floating rate notes (FRNs). FRNs are bonds that pay a variable rate of income, which is regularly reset in line with changes in interest rates. If interest rates rise, investors in FRNs will benefit from a higher income as their coupons are automatically adjusted upwards. Equally, should interest rates fall, then the coupons will be adjusted downwards.”
The manager continues: “The fund invests predominantly in FRNs issued by high-yield companies, which typically pay higher interest to compensate investors for the greater risk of default.”
It is a globally diversified portfolio of bonds and the manager has the flexibility to invest in what he believes are the best opportunities across different regions. His geographic focus is currently on economically stronger countries, such as the US and core Europe, while the portfolio is underweight peripheral Europe and emerging markets. Macroeconomic factors feed into the sector and geographic positioning of the portfolio but he reiterates the emphasis is on individual credit selection.
“The fund has virtually zero interest rate duration so, unlike conventional bond funds, duration positioning forms no part of the strategy,” Mr Tomlins adds.
He confirms there have been no changes to portfolio positioning over the past year. Instead, the fund remains defensively positioned in light of the prospect of further volatility in high-yield markets. Mr Tomlins reveals he favours non-cyclical businesses, such as cable operators and global packaging companies, on the basis they can perform in a variety of economic conditions.
He notes: “Most of the fund is invested in senior secured issues – in the event of bankruptcy, these instruments have a prior claim over an issuer’s assets, offering much better recovery rates and containing less downside risk compared to unsecured bonds.”
Sectors he is underweight include the energy and commodities sectors. Mr Tomlins acknowledges these areas have enjoyed a “solid rebound” in recent weeks but suggests he “expects to see further volatility given the continuing glut in supply”.
The fund sits at level three on the risk-reward scale, according to its key investor information document. Ongoing charges of 1.18 per cent apply to the sterling class R-H clean retail share class.
FE Analytics shows in the 12 months to May 3 2016, the fund made a 1.7 per cent loss, while the IA Sterling High Yield sector average return was -0.6 per cent.
EXPERT VIEW - Lucy Walker, head of third-party funds, Sarasin & Partners |
| Since launch, the fund has delivered similar returns to broader high-yield, but with substantially lower volatility. This is down to the close to zero duration, which is achieved by investing in floating rate notes, or in regular high yield, combined with a derivative to hedge out the interest rate exposure. We have long felt European loans are interesting but, since they are not eligible within Ucits vehicles, we think this fund is a good way to access a similar risk and return profile. |
Mr Tomlins admits the fund’s one-year performance figures to the end of March 2016 are down, in what he calls “challenging conditions” for the market.
“This is broadly in line with its benchmark (the BoA ML Global Floating Rate HY index), although ahead of its official peer group, which tend to invest mostly in conventional high-yield bonds,” he says. “Given their higher concentration of senior secured issues and lower levels of spread duration, high-yield FRNs tend to be less volatile than conventional high-yield bonds – this has been the case over the past year in what has been a turbulent period for high-yield markets.”
Mr Tomlins points out the portfolio’s underweight to energy and commodities has both helped and hindered performance since the fund launched: “The fund’s underweight exposure to energy, metals and mining companies has been the key sector call since launch in 2014, helping to shield the fund from the worst of market turbulence.
“While the fund’s cautious stance on the energy/commodity sectors has been mostly beneficial, some of the higher beta, ex-energy names have performed well over the past year and our underweight exposure to this part of the market has had a slight drag on relative performance.”
Mr Tomlins remains positive on the outlook for high-yield FRNs, as the Bank of England looks set to begin a rate-hiking cycle by 2017. He concludes: “The class looks attractive from an income perspective while also offering good scope for capital gains if spreads tighten.”
