The £1.4bn Jupiter Strategic Bond fund is a fairly recent addition to the strategic bond fund sector, having launched in June 2008.
Manager Ariel Bezalel says: “The aim of the fund is to manoeuvre it across the world of credit to the parts of the market we think will perform the best.”
In times of “risk on”, Mr Bezalel tries to capture the upside by positioning the portfolio in high yield and corporate credit. While in times of “risk off” the manager claims his macro foresight allows him to position the fund in more defensive parts of the credit market, such as high quality sovereigns.
Mr Bezalel describes his approach to investing as top down, bottom up with half his time spent on the macro outlook.
“Duration is something we do actively manage. Some of my peers don’t… but we do actively manage duration according to economic conditions. Our macro work will also have a bearing in terms of how much risk or how little risk is in the portfolio,” he explains.
He has a team of five analysts working with him on the bottom-up process which is seeking corporates that are committed to paying down debt.
Mr Bezalel says: “What we call these is deleveraging credit stories and we love a good story at the house of Jupiter. Companies will talk to us about the strategy of the company and ultimately how they are looking to repair the balance sheet over time.”
The team will also “venture out” into some of the more distressed areas of the credit arena, including businesses like Thomas Cook.
He adds: “We find ourselves also looking at a lot of high yield credit where ultimately our interests and the companies’ interests are aligned in terms of trying to deleverage the balance sheet.”
For the manager, a “true” strategic bond fund has as much flexibility at its disposal as possible. So he is neither restricted in terms of geography nor where he can position the fund across the ratings spectrum.
According to Mr Bezalel, the banking sector has been a constant theme in the fund for the past 24 months and he predicts this theme will continue to play out. He explains: “Banks are very much a deleveraging credit story because banks are under ongoing pressure to bolster their balance sheets and that’s pressure driven by central banks, governments, regulators; not primarily company management but other forces outside that which are forcing the banks to recapitalise and strengthen their balance sheets.”
He adds: “In terms of the banks we like it’s primarily the UK banks, so today we have about a quarter of the fund in banks, of which comfortably more than half of that is in the UK banks.”
Among the IMA Sterling Strategic Bond sector Mr Bezalel’s fund ranks top quartile across one, three and five years. It has delivered returns of 95.25 per cent for five years, compared to a return of 62.31 per cent from the IMA sector, according to FE Analytics.
The fund can boast that it has not suffered any losses on the back of defaults in its six-year history.
“One of the reasons I believe we’ve had a strong performance over the years combined with low volatility is because our approach when we’re looking at any new credit story, the first question we ask is, what’s our downside? Because of our ongoing focus on the downside rather than what the upside is, the fund has experienced low volatility.”
Mr Bezalel cites oil rig financing as one of the themes that has done well for the fund’s performance and which currently accounts for 7 per cent of the portfolio. “What we’re doing is providing long term funding to companies that have built an oil rig, these rigs are then leased out to the oil majors or the national oil companies on substantial day rates.
“The attraction for us is not just the visible cashflows and the long term contracts that they sign but the fact we believe our downside is somewhat protected because we’re secured on the rig itself,” he says.
When asked how the fund is positioned for 2014, the manager admits to being “more patient” when it comes to putting money to work and forecasts more volatility on the horizon. He observes that while a US economic recovery is taking shape, there is some uncertainty about whether it can “stand on its own two feet” as the Federal Reserve continues tapering.
Juliet Schooling-Latter, research director, Chelsea Financial Services
VERDICT:
This is one of my favourite funds in the sector and it has been in our Core Selection for some time. The manager, Ariel Bezalel, seeks out the best opportunities within the global fixed interest universe. He is free to identify debt issues he feels are mispriced, using bottom-up fundamental analysis, and prefers companies with robust business models and recurring revenue streams. Jupiter changed the fund’s objective in December last year and the manager can now use derivatives for investment purposes as well as efficient portfolio management. It gives him a few more tools with which to manage the fund at a time when I think they could be very useful (as interest rates start to rise). The yield is very attractive for income investors (5.5 per cent) and, while Ariel currently has quite a high weighting to high yield, I look on it as one of the lower risk funds in the sector.
