Fixed Income  

S&W bond fund hit by lack of financials

The performance of Chris Lynas’s £36m Smith & Williamson Fixed Interest fund has been hurt in the past 12 months by not owning high-yield bonds or financials as the sectors rallied.

Mr Lynas, head of fixed interest at Smith & Williamson, has seen his fund drop to the bottom of the rankings in the IMA Sterling Corporate Bond sector in the 12 months to October 8, according to FE Analytics. It lost 2 per cent in that period compared with a sector average gain of 2.9 per cent.

The manager said a lack of exposure to several sectors that led 2013 performance – such as high-yield bonds and bonds issued by banks and other financial firms – were to blame for the underperformance.

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But Mr Lynas said the calls were made “quite deliberately” and he would not seek to reverse his stance.

“We haven’t had exposure to financials, which have done very well, but I still think banks’ balance sheets are challenged,” he said.

“I’ve been watching the situation at the Co-Op Bank with great interest as I think the regulators will look to use it as a template for collapsing a bank without a great impact on the rest of the financial system. There are still a lot of ‘zombie’ banks out there that can’t lend money and they need to be collapsed.”

Mr Lynas has also held a small amount of 10-year US and UK government bonds – one of the areas most hit by the sell-off in the summer. But he maintained that following the sell-off there was still significant value in these bonds and at the end of August the Fixed Interest fund had 7.8 per cent invested in a UK gilt maturing in 2022, according to its factsheet.

The manager said: “We’ve been invested in the belly of the curve that lost the most but I would expect it to recover the most. The funds that have done well have been the ones investing in the very short or very long-dated bonds [but] we have probably seen the low point in this cycle.”

But Mr Lynas warned that bonds face “headwinds” if the UK economy continues to improve. The IMF last week upped its growth forecast for the UK, predicting that the economy would grow by 1.4 per cent this year and 1.9 per cent in 2014 – significantly higher than even UK-based forecasts.

“It’s nice to see that positive report from the IMF,” the manager said. “We will see growth but not of inflation yet, which is a benign environment for bonds. A higher inflation forecast will be a headwind.”