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”.
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.
The manager attributes the fund’s strong performance versus the sector to its consistent process but also to corporate bond selection in the portfolio.
He continues: “The UK gilt market outperformed credit during the first quarter and, with rates falling, long-duration securities gave the best returns. While underweight, the fund still carries a very high proportion of gilts, thus the absolute performance of the fund has been strong. The new corporate positions purchased mid-quarter have performed well.
“We occasionally run non-sterling currency exposure – a 3 per cent exposure to US dollar-denominated conventional and inflation-indexed US Treasuries performed very well.”
But bonds issued by banks and insurance companies had a poor start to the year, he admits, which detracted from the fund’s performance, “as did some European utility and energy companies, especially those with excessive exposure to nuclear power and coal”.
“While the portfolio suffered as a consequence of these moves, we added exposure to financials in March and have benefited from the subsequent recovery,” he confirms.
“In fact, we have maintained exposure to all areas of credit as we believe the early-year weakness was unfounded from a fundamental perspective.”
Mr Godley expects interest rates to remain low and suggests the impact of monetary policy easing in Europe will also help to keep bond yields low in the UK.
“As such, we continue to look for opportunities to lock in attractive yields in the corporate bond arena, either by investing in new bond issues or utilising weakness to increase exposure,” he concludes.
