Euan McNeil and Stephen Snowden are co-managers of Kames Capital’s £1.1bn Investment Grade Bond fund.
As the former explains, the fund is tasked with outperforming the Investment Association (IA) Sterling Corporate Bond peer group by investing mainly in investment-grade and government bonds denominated in sterling. The managers can also hold a maximum of 20 per cent of the portfolio in high yield.
Mr McNeil explains the process behind the fund draws upon six “key sources of alpha”.
“We actively manage the asset allocation, duration and curve positioning of the portfolio to reflect the top-down view of the team,” he says. “Our portfolios also tend to be at the more concentrated end of the peer group, with typically 120-150 holdings. This reflects our high-conviction approach, which seeks to take advantage of the depth of credit analysis on our team.”
He adds: “Managing the exposure to different credit-ratings buckets, and positioning the portfolio accordingly, is an important driver of relative returns. Analysing the relative merits of different sectors – for example, banks versus industrials – represents the final source of alpha.”
He acknowledges the emphasis on each performance driver varies “from time to time” to take into account the stage of the economic cycle and what is driving markets. So, how have the managers responded to recent changes in the macroeconomic environment in the portfolio? As Mr McNeil recalls, after a period of heightened risk aversion in January and most of February this year, there was a “marked recovery” in credit spreads in March.
He notes: “Credit valuations remain attractive on a longer term time horizon, although the strength of the rally we have seen over the past couple of months has led us to de-risk the portfolio. This has involved selling down some of the higher beta names in the portfolio, [such as] AT1 (additional tier one) and corporate hybrids. Consistent with the decision to lighten the portfolio’s credit risk, we have also moderated the extent of the short duration position. Yields have risen around 25 basis points off their lows and, while they are still stretched on any medium-term view, we may see some retracement in the coming months as we approach the Brexit vote.”
| EXPERT VIEW - Darius McDermott, managing director, Chelsea Financial Services |
| I really like this fund. It is elite rated and has been on the Chelsea selection for a number of years. Euan McNeil has run the fund since 2009 and Stephen Snowden joined him in 2011. The managers work well together and use the resources in the wider team (not just in the UK but in Kames’ offices in the Netherlands and US) to their advantage. They prioritise both income – the fund currently yields 3.37 per cent – and growth, looking to exploit changes in the creditworthiness of companies and also in expectations of the path of interest rates. It’s reasonably large now, but still nimble enough to react quickly to changing market conditions. |
This is a fairly low-risk fund for investors to hold in their portfolio, as the key investor information document shows it sits at level three out of seven on the risk-reward scale. Ongoing charges of 0.79 per cent apply to the clean B accumulation share class.
The fund’s performance figures are testament to the pair’s investment process. According to FE Analytics, it has outperformed the IA Sterling Corporate Bond sector over one, three and five years in line with its objective. Mr McNeil suggests: “We have managed to successfully capture most of the risk inflection points in markets, and stock selection has also been strong.”
Over five years to April 25 2016 the fund returned 39.3 per cent, while the peer group average return was 29.7 per cent. In the past 12 months, the fund has struggled to deliver a decent return but it remains in positive territory, generating 0.7 per cent, while the sector averaged a 0.04 per cent loss.
Mr McNeil identifies its position in secured bonds from property company CGIS as a “standout performer” in the portfolio. He says: “The issuer decided to redeem the bonds early in January of this year, at a significant premium to where bonds were indicated in the market, which represented a contribution of between 10 and 15bps to performance at a fund level.
“Recent trading activity (the re-risking in early February) has been an additive to performance, with the fund generally managing to capture some of the wide trading ranges in corporate hybrid names – notably Centrica and Solvay. Using the portfolio’s full flexibility and ability to invest in non-sterling credit in particular, was beneficial in the first quarter of 2016 when there was precious little in the way of new issuance opportunities in sterling.”
He cites continued active participation in attractively priced new issuance in March as having helped the fund’s performance, highlighting the Anheuser-Busch euro issue, as well as sterling issues from Scentre Group, Yorkshire Water and Motability.
