Fixed Income  

Fund Review: Baillie Gifford High Yield Bond

This article is part of
Fund Review: High Yield Bonds

The objective of the £604.6m Baillie Gifford High Yield Bond fund is to achieve a high level of total return through investing in a diversified portfolio of primarily sub-investment-grade bonds.

Co-manager Donald Phillips adds: “We’re a bottom-up investor so we’re not taking macro views. We’re trying to invest in resilient companies that will survive the cycle.”

Mr Phillips, along with co-manager Robert Baltzer, runs a concentrated portfolio that typically comprises between 40 and 60 issuers. He acknowledges this approach is considered “relatively unique” in the high-yield space.

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The philosophy behind that strategy is to focus on a subset of the market in order to familiarise themselves with those businesses.

He explains: “We won’t research every single business that’s borrowing money in the high-yield market – we don’t think we need to. The opportunity cost of missing out on a big winner is quite low in the bond market.

“It’s not like an equities portfolio, where if you miss out on something that goes up five times or 10 times, then that looks like negative performance.”

He goes on: “We think we can find relatively unloved businesses on a reasonably attractive yield, where perhaps the market is missing certain attributes we are more confident in.

“What we will try to do in our original research is think of milestones – a company-based performance milestone that a business can achieve, which will increase our conviction in the bond issuer and, in so doing, make itself a safer borrower.”

The portfolio will usually take small positions in new companies, but as the managers’ conviction grows, that position could increase to 3-3.5 per cent, with no more than 5 per cent in any one bond issuer as a rule.

Mr Phillips sums it up as a long-term stockpicking approach, although the term is not often used in the context of a bond fund. While top-down views may influence initial research, he insists they do not drive the “shape” of the portfolio.

The managers also try to trade infrequently, with Mr Phillips acknowledging the high-yield bond market can be relatively expensive to trade in. The risk-reward indicator on the fund’s Kiid is moderate at a level 4, while the ongoing charges listed are relatively low at 1.04 per cent.

The fund ranks second in the IMA Sterling High Yield sector over three years, having delivered a return of 26.97 per cent in the period to May 14 2014, according to FE Analytics. In the five years to May 14 it has returned an impressive 21.27 per cent, keeping it in second place among its peer.

The manager says: “We prefer to look over longer time horizons because of our long-term approach. So over three years Rob [Baltzer] and I can take a lot of the credit for performance.”

Mr Phillips admits the five-year performance can be attributed in part to the previous manager and he emphasises that it is a team-based strategy.