Fixed Income  

Finding sustainable yield in sterling bonds

This article is part of
Fund Review: Strategic Bond

Finding sustainable yield in sterling bonds

John Godley and Martin Price have co-managed the £153m Sarasin Sterling Bond fund since its launch in May 2006.

Mr Godley says: “Its aim is to provide a sustainable yield in excess of the UK gilt market and a total relative return higher than the benchmark, which is 50 per cent FTSE UK Gilts All Stocks, 50 per cent BofA Merrill Lynch Sterling Non-Gilt.”

According to Mr Godley, the aim and process have remained consistent but the benchmark was changed in 2012 from 100 per cent FTSE UK Gilts All Stocks to the 50/50 benchmark “to align more closely with the usual asset allocation”.

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The process combines top-down macroeconomic fundamental analysis with bottom-up stock selection. “We actively manage the country and currency exposure, interest rate risk (duration), yield curve positioning (convexity) and credit risk (the government/corporate bond mix).

Sector and company-specific risk is managed through active sector, issuer and stock selections,” he notes.

Macroeconomic analysis influences country, currency and duration decisions in the portfolio. “It also directly influences our asset allocation between government and credit, and impacts on our views of specific credit sectors,” he acknowledges.

“Economic fundamentals will influence our decisions on investment into higher risk areas of the bond market, such as high yield, loans or emerging markets.”

The managers responded to the “very weak start” to the year for risk assets by increasing the fund’s allocation to credit, and the risk within the credit portfolio, in late February and early March.

Mr Godley reveals: “We sold UK gilts and invested the proceeds into corporate bonds, which we believe offered exceptional value. These included subordinated issues from banks and insurance companies, utilities and some asset-backed securities. We also invested in a third-party managed high-yield bond fund.”

The I share class, which is available to retail investors, has ongoing charges of 0.72 per cent, while the fund sits firmly in the middle of the risk-reward scale at level four.

EXPERT VIEW - Ryan Hughes, fund manager, Apollo Multi Asset Management

Verdict

This fund sits in the Strategic Bond sector but is much more akin to a lower risk bond fund given its benchmark of 50 per cent UK gilts and 50 per cent corporate bonds.

Managers John Godley and Martin Price have been at the helm since inception in 2006 and, therefore, have extensive experience in fixed interest markets.

Given the fund’s lower risk approach through a large allocation to government bonds and no exposure to high yield bonds, this fund will likely lag the sector in strong, risk-on environments but should perform well when risk aversion kicks in.

The fund has outperformed the IA Sterling Strategic Bond sector over one and five years, delivering a return of 30.7 per cent over five years to April 20, while the peer group averaged 25.6 per cent. In the past 12 months, the fund has generated a more modest 0.1 per cent but it still beat the average loss in the sector of 1.2 per cent.