The TwentyFour fund, run by a team headed up by the firm’s chief investment officer Mark Holman, has risen in size by more than £110m in the month to May 22.
And Mr Holman said a significant portion of that rise, which has caused the fund’s assets to increase by nearly 40 per cent, has come from big investors such as multi-managers and discretionary managers who have sold the L&G Dynamic Bond Trust following star manager Richard Hodges’ departure.
“In the past six weeks there has been a disturbance of assets in the strategic bond sector,” Mr Holman said.
“We have seen clients moving over from Legal & General after Dickie Hodges left and there have been material outflows from Dickie’s fund.”
The TwentyFour fund has risen in size from £291m on April 22 to £404m on May 22, a period in which the performance gain on the fund was only 1 per cent.
It was only launched in 2010 and has delivered top decile performance in the past six months, one year and three years and is rapidly gaining popularity among investors.
The sudden influx of cash in the fund had raised the possibility of “cash drag”, where the fund cannot invest the money quickly and the high cash weighting brings down performance. But Mr Holman said the team had found plenty of opportunities to deploy the money quickly adding the managers were particularly favouring financial debt.
In its latest factsheet, for the period to the end of April 2014, the fund had more than 50 per cent in financial debt, with 31 per cent in bank bonds and a further 21 per cent in the bonds issued by insurance companies.
But Mr Holman said the team had been adding to those positions on the view the sector was “still a bit undervalued”.
As well as putting new money to work in the sector, Mr Holman said that the TwentyFour fund had also begun to “slowly reduce” its positions in high yield corporate debt.
At the end of April the fund had 21 per cent of its assets in high yield, but the team is shrinking those positions.
Mr Holman said high yield was the “most expensive part of the market by a reasonable margin” and such bonds were more expensive on a relative value basis than at most points in the history of the high yield market.
However, he said he did not see any near-term catalyst for that situation to change so he said the bonds will “probably get more expensive” before any significant correction occurs.
He claimed that such a sell-off would likely come at the end of the market cycle but said he thought the market was currently “not anywhere near the end of the cycle”.
In response to claims that the L&G Dynamic Bond Trust was suffering from outflows, a spokesperson for L&G said: “It is true that there have been a certain level of outflows as some investors react to a manager change.
“We are delighted, however, that the vast majority of our investors to date remain committed to DBT under the leadership of Martin Reeves.”
Will pressure move to peripheral plays?
While he believes the high yield corporate market is the most expensive area of fixed income, TwentyFour’s Mark Holman (pictured) has warned that peripheral European debt is quickly catching it up.
In a blog post on TwentyFour’s website, Mr Holman said: “Very much in the same way that high yield corporates have become a crowded trade with most of the value having been extracted, Europe’s periphery is also beginning to show signs of becoming too conformist.”
Mr Holman said the process had been accelerated by the suggestions from the European Central Bank (ECB) that it may embark on some sort of monetary easing measure this month.
However, the manager warned that investors may “get ahead of themselves” by pricing in action from the ECB, buying up peripheral debt and certain equities such as banks, which should benefit from ECB easing.
He said: “Investors do need to remember that the periphery is a weaker environment than the core, which is in turn weaker than the UK or US; as such there are plenty of alternatives to be found.”
Instead of European peripheral debt, Mr Holman said he instead prefers European asset-backed securities (ABS) which is one of the few sectors of the fixed income market that is much cheaper than it was before the financial crisis.
