Ariel Bezalel has run this £3.2bn fund since its launch in June 2008 with a total return approach and an “objective of maximising fixed income opportunities across regions and sectors”.
The manager “blends top-down analysis with bottom-up security selection”. He explains: “The starting point of [the] process is to form a view on the macroeconomic environment.”
From this, he assesses countries and sectors likely to offer the most compelling opportunities, looking for “situations offering value and an asymmetric risk/reward payoff”.
Mr Bezalel continues: “The portfolio has a ‘go-anywhere’ strategy meaning that, within the fund’s stated investment objective, it is able to invest across the range of fixed income securities and a wide geographical remit. The fund’s flexible investment strategies together with a broad investment mandate are, in our opinion, significant drivers of return.”
Macroeconomics determine the portfolio’s duration and yield curve positioning, although the manager asserts the most important elements in constructing a portfolio are sector allocation and issue selection.
Turning to recent changes he has made, he says: “We reduced portfolio duration by more than three years during the third quarter of 2016, to approximately 2.6 years. This was achieved by selling our US Treasury holdings and reducing the tenor of the Australian government bond holdings, reducing long-dated investment grade exposure and by opening a short position against the 10-year German bund. We upped our exposure to foreign and local currency bonds (unhedged) in India and Argentina. Both allocations performed well in the third quarter, with India standing out as a benign inflation outlook stoked expectations of a further rate cut by the Reserve Bank of India. The emerging market exposure of the fund now stands at approximately 15 per cent.”
Mr Bezalel has also selectively added to the portfolio’s positions in UK banks in the wake of the vote to leave the EU and reduced its overall exposure to contingent convertibles at the same time.
He suggests: “Our extensive scenario analysis suggests that the UK banking sector is strong enough to deal with a range of possible shocks, both from a liquidity and solvency perspective. In Japan, we also opened a position in the convertible bonds of selected corporate names (currency hedged) which we believe are likely to benefit from further fiscal stimulus.”
The clean I share class has ongoing charges of 0.73 per cent and is at level three on a risk-reward scale, so is considered fairly low risk.
The fund has outperformed its peer group, the IA Sterling Strategic Bond sector, over one, three and five years, according to FE Analytics. Over five years to November 16 the fund generated a 41.6 per cent return, compared to the sector average 30.8 per cent over the same period and just ahead of its benchmark, the IBoxx UK Sterling Non-Gilts All Maturities index which rose 40 per cent. In the past year, the fund has returned 6.6 per cent to investors, lagging the index which gained 9 per cent in the 12 months to November 16 but beating the peer group average of 5.5 per cent.
Mr Bezalel cites two trades as being behind this outperformance, including the reduction of duration. He points out: “Selective emerging markets exposure has performed well. For example, Codere, a Spanish multinational group, has a presence in eight countries in Europe and Latin America. Its main exposure is to Argentina, [which] we like and think the bonds offer attractive yields versus comparables.”
But Australian and New Zealand government bonds detracted from performance in October and November as global yields “backed up”, he notes. “However, the weakness was partially offset by our short position against the 10-year German bund.”
With bond markets reacting negatively Donald Trump’s election as US president, Mr Bezalel observes: “[Mr] Trump’s call for fiscal stimulus post-results has put pressure on global yield curves and we expect this to continue over the short to medium term. Therefore, we expect further repricing. From a credit perspective, sectors benefiting from [Mr] Trump’s policies should be infrastructure, industrials and financials (on the back of higher rates and deregulation).”
