He acknowledges that many of the funds in the sector have different objectives and can invest in what he calls different “flavours” of corporate bonds.
Chris Bowie explains: “Our fund has a pretty wide remit but is predominantly invested in corporate bonds. But it can have up to 15 per cent in high yield, which it often does.”
He adds: “We’re investing not just for yield and income but also for capital gain. We try and buy based on the level of the yield, but over and above that we also want to buy bonds that are appreciating in value and therefore at some point we hope to sell them to make capital gain.”
Process
Co-managers Mr Bowie and Adam Walker combine top-down and bottom-up approaches to investing in the portfolio. They take macro-led views on where there is value in fixed income, with consideration for interest rates, the shape of the yield curve and how much interest-rate risk they want to take in the portfolio.
The manager currently likes corporate hybrids, which are corporate bonds from non-financial companies. Within this, Mr Bowie favours utilities firms for their strong and “predictable” cash flows and stable operations.
“Once we like a company in those sorts of sectors we prefer to loan them money at the hybrid end of the spectrum, which is the riskier side,” he observes. “So it’s more junior debt and therefore if the company ever got into trouble then potentially those bonds would fall in value more than the senior bonds. But that’s one of the reasons why when we invest in corporate hybrids we prefer companies that are very strong.”
Mr Bowie adds: “We always think from a risk-adjusted perspective. Of course, we look at the return potential but you always have to consider the downside risk in bond investment because in corporate bonds you can lose money in different ways.”
The fund also has an overweight to the collateralised sector where bond investors are protected by the collateral pledged against loans. “It tends to yield a little bit more than other sectors. The reason for that is because you need to spend a lot more time analysing these bonds. You need to understand what the asset quality of the collateral is. We have dedicated analysts here who do that full time.”
The fund’s synthetic risk indicator is at five, which is at the higher risk end, while the ongoing charge is 1.18 per cent.
Performance
The managers took over the fund at the end of 2008 and have delivered top-quartile performance to investors ever since. Over the five years to May 19 2014, the fund has returned 90.57 per cent, against the IMA Sterling Corporate Bond sector average of 55.32 per cent, according to FE Analytics. Three-year performance of the fund has delivered returns of 25.42 per cent, compared to a sector average of 19.41 per cent.
Mr Bowie owes the fund’s outperformance to “getting the big calls right”, one of which was to de-risk by selling a lot of its riskiest banking paper in 2010.
“One of the other big calls we got right was to go underweight peripheral Europe in late 2010, early 2011 ahead of the sovereign crisis that took place in the summer of 2011,” he notes. But Mr Bowie admits that where the portfolio has missed out is by not adding enough back to peripheral European risk in the past year.
Turning to his outlook for the rest of 2014, Mr Bowie cautions that investors should prepare for some volatile months. “I think, in general, bonds are more attractive than they were 18 months ago but there is still the chance of volatility to come on individual months,” he points out. “Yields have become more attractive but we still have some issues to get through – it could be the political risk in Ukraine, the unemployment concerns in Europe – so I don’t think investors are going to have a smooth ride every month for the next few years.”
Expert view
Martin Bamford, managing director, Informed Choice: “This is one of the strongest performers in the IMA Sterling Corporate Bond sector, in spite of its relatively small size of £244m. It has a healthy distribution yield of 3.3 per cent and an experienced management team that has been working together for more than five years, backed up by an experienced credit team. There is a strong focus on macroeconomic assessment, looking at the key themes that drive markets and then investing based on their assessment of these factors. Input into the fund strategy and asset allocation takes place at a senior level in Ignis, with the chief economist and chief investment officer both playing a pivotal role in the ongoing management of the fund.”
