The £508.12m fund is co-managed by Torcail Stewart and Stephen Rodger.
Its aim is to produce a high level of monthly income “through investing in mainly investment grade and high yield bonds issued by companies worldwide”, says Mr Stewart.
“A key part of the process is that it is primarily [based on] bottom-up stock selection and we also take high active positions, so you’ll see that 2-3 per cent position sizes are not uncommon in this fund.”
Ideas for the portfolio are generated in a number of ways, with the managers and their team attending conferences and setting up company meetings. Mr Stewart says: “Normally about a quarter or a third of the purchases we make for the fund are in the new issue market – sometimes we do find some quite attractive companies in that new issue market. We also share research and are in quite close contact with our equity colleagues.”
A key part of the process is a sector valuation screen. “Each of our analysts and managers undertakes a screen of the sectors that they cover, and what’s quite good in the credit market is you can readily identify if a bond is cheap or not. In equity markets, you have to look at the p/e [price to earnings] ratio and that takes a lot of assumptions to generate what the earnings per share will be going forward, whereas in credit markets you just look at the spread. So the spread immediately identifies that the bond is cheap for its given rating category.”
Managers also pay attention to what Mr Stewart calls “credit milestones”, monitored weekly for each of the companies they lend to. “That, in effect, is where we’re setting out how we expect the company to perform going forward, what are the positive milestones to see the balance sheet is improving and, equally, what are the warning signals we should be looking out for.”
Some of the largest positions are presented to the entire equity team. “You get quite a lot of questions from the partners. In effect, you’re able to give some of your larger positions a good kicking from senior people in the firm. Usually that’s quite a good way of confirming whether or not you want to increase your conviction or potentially reduce.”
The B share class, which is the clean retail share class for the fund, has ongoing charges of 0.53 per cent and ranks at level four on a risk and reward scale.
The fund has notched up several years of long-term outperformance, placing it top quartile in the Investment Association Sterling Strategic Bond sector. According to FE Analytics, in the 10 years to May 21 the portfolio delivered 76.55 per cent against the sector’s average of 56.27 per cent.