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.
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.
He notes: “We will try to keep the faith in our holdings when the market sentiment is a little bit more negative. Market sentiment as of April/May 2009 was just starting to return. So for a fully invested high-yield bond fund we would expect to have good performance coming from quite a low ebb.
“Three years ago [it was] a different story, the market was in much better shape. We can point to stockpicking as an important part of performance.”
While there are no particular overweight or underweight holdings in the portfolio, the manager admits a recent underweight in European peripheral banks may have taken away from performance.
However, he reiterates: “It’s important for us that we do have that conviction and faith in the right companies and we think our research process is geared up to justify that conviction.
“Hopefully, over the course of three or five years, our stockpicking and lack of trading will allow us to outperform.”
EXPERT VIEW
Rob Morgan, pension and investment analyst, Charles Stanley Direct:
Verdict
“The managers Rob Baltzer and Donald Phillips now have a three-year track record, a yardstick that many investors insist upon before taking a closer look. Performance in this time has been very encouraging and it is top quartile across one and three years. It’s quite focused for a bond fund with less than 100 holdings, a true stockpicking fund and, as you would expect from a Baillie Gifford fund, turnover is pretty low. It is good to see some emerging talent in this sector and I believe it is a fund well worth keeping an eye on. But their tenure has been entirely within a bull market for the asset class, so it will be interesting to see how they do in more testing times.”
