Fixed Income  

Rising inflows prove double-edged sword for Kames

Kames Capital has found significant inflows into its corporate bond funds to be a double-edged sword as market liquidity dries up, head of fixed income David Roberts has said.

The asset manager, an outspoken critic of large bond funds and the liquidity issues they face, looks set for one of its best months for inflows in recent years in July, Mr Roberts said.

He said the inflows were providing good investment opportunities but also causing the managers some “issues” due to concerns about the ease and speed at which they can trade in to and out of positions.

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However, he denied that the team had experienced any performance issues so far, even though the process of buying new bonds recently has “not been quite as easy as we would have liked, because we have seen a lack of supply coming into the market”.

Mr Roberts also claimed that he had been able to pick up some assets cheaply because of the forced selling caused by redemptions on rival bond funds.

Speaking about where he was investing the new inflows, Mr Roberts said he was looking to mainly buy into “core, higher-quality, publicly listed corporate bonds” because it was of the higher liquidity offered by this area of the market.

This focus has meant that the net cash flow in July, which increased by around 7 per cent, was mainly used to buy into AA-rated or A-rated bonds. New holdings included Pepsi Cola, General Electric and Rabobank.

The focus on buying higher quality bonds has not just been for liquidity reasons, Mr Roberts added, but is also part of a process of “de-risking” that Kames has undertaken on its investment grade funds following the market sell-off in May and June, triggered when the US Federal Reserve said it would be reducing its quantitative easing programme later this year.

“We have seen sharp rebounds of close to 5 per cent in some bonds in the space of a few weeks and we’ve looked to de-risk with the cash coming into the portfolio,” he said.

Mr Roberts said within his £502m Kames Sterling Corporate Bond fund he and co-manager Iain Buckle had sought to “dilute” the fund’s weighting to bonds rated BBB or lower, which had stood at roughly a third of the portfolio.

He said: “We are trying to play markets but also have little bit less interest rate risk than the market and our peers.”

As well as the Kames Sterling Corporate Bond fund, the company also offers the £592m Kames Investment Grade Bond fund, which is run by Stephen Snowden and Stephen McNeil and was recently made a member of the Investment Adviser 100 Club of top performing funds.

Both funds are in the first quartile of the IMA Sterling Corporate Bond sector for both one and three years to July 26, according to FE Analytics.

Kames’ fixed income range is rounded out by the £264.8m Kames Ethical Corporate Bond fund, managed by Mr Buckle and Mr McNeil.