Since Henderson took over the £547.58m Henderson Sterling Bond fund in 2009, after the firm’s acquisition of New Star, the performance of the fund under the management of Stephen Thariyan and Philip Payne, has been consistent, with its five year return almost double that of the IMA Sterling Corporate Bond sector average.
The main aim of the fund is to achieve a high and stable level of income, by investing principally in sterling-denominated fixed interest securities including preference shares, but concentrating on investment grade corporate bonds.
Mr Payne notes: “Our process blends our top-down macroeconomic view with our bottom-up ideas generation. The macro view sets the overall risk level for the structure of the fund. We then populate from the bottom-up, incorporating the sector and issuer preferences of the credit specialists that fit in with our top-down view.”
The co-manager notes the investment process “leverages the talent of Henderson’s Credit Team in analysing debt securities”, and which provides “unconstrained idea generation for the portfolio”. The analysis also aims to identify securities from issuers with positive company or industry-specific trends.
“Cash generation, leverage levels, capital ratios, relative value and company management behaviour are analysed and the technical aspects of the market are monitored to gauge likely short and long-term pricing of bonds,” he adds.
This more unconstrained approach perhaps explains why the key investor information document points to a level 5 risk reward indicator, and ongoing charges of 1.45 per cent.
Mr Payne adds that fundamental credit analysis forms the principal part of the investment process as the credit team seeks to identify value within securities. “This cannot be done in isolation, however, since interest rate and inflation rate expectations, together with market supply and demand for bonds will have a bearing on bond yields. Similarly, the general macroeconomic environment will contribute to earnings at companies and will help shape industry dynamics so this needs to be factored into the credit analysis.”
For the five years to May 21 2014 the fund has delivered a return of 95.48 per cent, according to FE Analytics, compared with the IMA Sterling Corporate Bond sector average of 54.5 per cent. The three year performance is equally solid with the return of 19.78 per cent again outperforming the sector. Shorter term performance, however, has been less impressive with the vehicle recording a loss of 0.38 per cent in 2013 compared with the 0.64 per cent sector average.
Mr Payne notes the strong performance over the longer term of five years “reflects tenacity at the height of the credit crisis, when value was evident in corporate bonds, and good security selection within financials”.
However, he adds: “Performance in 2013 was impacted by the duration exposure of the fund and the limited exposure the fund had to the strongest performing parts of the market such as perpetual bank bonds and Spanish and Italian corporate issuers.
“Performance in the early part of 2014 has benefited from maintaining the duration exposure in the fund and increasing exposure to lower rated issuers.”
In terms of the current composition of the portfolio, the Henderson Sterling Bond unit trust has almost half its portfolio, 48.3 per cent, in BBB-rated bonds, while just 1.4 per cent is in AAA-rated securities.
Mr Payne explains: “We continue to favour lower-rated over higher-rated bonds and over the last six months we have been increasing exposure to BBB and BB rated issuers while reducing exposure to A-rated and higher issuers. From a sector basis, the fund has been increasing exposure to insurance while reducing banks, while also adding to industrials, telecoms and media. Exposure to issuers from Spain and Italy has also been increased over the period.”
In terms of sectors the manager notes the performance has benefited from its positions in UK banks such as Lloyds and Nationwide, as well as insurance and media names, including Scottish Widows, Standard Life, Time Warner Cable and Daily Mail.
In contrast, he admits exposure to longer duration sectors such as utilities and telecoms detracted during 2013. Particularly as he notes: “The utilities sector has continued to be under-pressure this year due to increased political and regulatory risk which has also detracted from performance.”
Martin Bamford, chartered financial planner and managing director, Informed Choice
VERDICT
This is a fairly obvious choice for an investment grade corporate bond fund, offering attractive above sector average performance over the longer term and a high level of income, currently offering a 3.3 per cent distribution yield. This matches the underlying yield of the fund. The management team of Stephen Thariyan and Philip Payne have been in place for over five years and the fund has attracted more than half a billion of assets under management. With 260 holdings this is a well diversified fund, albeit with its focus on sterling-denominated investment grade corporate bonds. The clean pricing of 0.6 per cent per annum makes the fund a little pricey, but for a solid core bond fund holding, it is a price worth paying.
