The £326m Royal London Short Duration Global High Yield Bond fund is managed by Azhar Hussain and Stephen Tapley with the aim of providing a steady high income with low volatility.
Mr Hussain explains: “In the current market environment this means a return profile of 4-6 per cent while aiming to be uncorrelated to wider market fluctuations. The fund aims to buy bonds at the end of their economic lives to minimise default, volatility and liquidity risks. A short expected redemption profile helps to insulate the portfolio against both interest rate risk and credit spreads widening.”
The team’s investment process involves screening the global high-yield universe for candidates that fit the profile of the portfolio. The manager points out the bonds should be within two years of redemption and have been issued by companies that are “easily analysable, understandable and forecastable”.
Mr Hussain says the team tries to personally meet all of the firm’s they invest in. “We then model the company’s cash flow to ensure that it has a sustainable route of redemption, either through internal resources or through access to the high-yield market at a price that would make sense for the company and investors. As we are modelling out for a maximum of 24 months, it provides us with much more certainty on the investments that we are making when compared with a regular high-yield strategy.”
The fund’s process has remained unchanged since inception on April 9 2013, with Mr Hussain pointing out he has operated the “same strategy in exactly the same way for 13 years. This gives me confidence that my approach works throughout the credit cycle”.
He adds: “Where we are in the credit cycle dictates how aggressive we can be in terms of concentration of positions and the mix of callable and final maturity bonds, as well as the level of cushion we require to insulate us for spread volatility.”
The fund’s clean Z income share class sits at a risk-reward level of four out of seven, while the ongoing charges are 0.49 per cent.
The fund’s A income share class has delivered a strong 12.7 per cent return since launch to May 6 2016, compared with the Investment Association Sterling High Yield sector’s average return of 8.4 per cent. The vehicle has also significantly outperformed the group over 12 months, returning 3.4 per cent against the sector’s average loss of 1 per cent, data from FE Analytics shows.
Mr Hussain says the fund has performed “steadily and consistently through very choppy markets”, which he attributes to the strategy of buying short-duration bonds that matured when they were expected to. “Unlike longer-duration bond funds, the [portfolio] is less subject to the uncertainties found in the broader markets attached to duration and default risks,” he explains.
EXPERT VIEW - Lucy Walker, head of third-party funds, Sarasin & Partners |
| Given its short-duration mandate, this fund is biased to bonds close to maturity, with half the portfolio maturing in just three months. This gives the vehicle a more conservative profile because the team has better visibility over possible defaults. The fund is biased to the BB/B part of the universe, having limited exposure to the riskier end of the rating spectrum (CCC and below). The portfolio has delivered its objective of Libor +2 per cent. |
In terms of recent changes the manager notes the energy-led sell-off resulted in substantial spread widening across the US, the largest part of the global high-yield market, which provided the team “with a lot of opportunities in a regional segment where we had previously been underweight on valuation”.
The manager adds: “The spread widening has led to an increase in the overall credit quality of our fund as we have many more high-quality candidates that we can screen as they meet our minimum spread requirements, such as a recent purchase of a two-year maturity in BB-rated Tesco.”
With such strong performance, Mr Hussain notes the fund is “really boring in that almost all of its holdings do well as we do not tend to have star winners or scary losers”.
The manager points out: “We buy bonds at a yield of 4 or 5 per cent and hold them through to redemption. The surprises we do have tend to be when companies redeem bonds even earlier than we expect. Recently we had Numericable refinance its 2019 bonds that we held. While we envisioned the company redeeming these bonds in 2018, they surprised us and the market by taking them out early by paying a three-point premium to where we had bought them.”
