Absolute Return  

TwentyFour's Bowie cuts high-yield over political risks

TwentyFour's Bowie cuts high-yield over political risks
Ratings breakdown of the AR Credit fund

TwentyFour Asset Management’s Chris Bowie has been taking risk out of his absolute return fund in the face of political uncertainty including the build-up to yesterday's French election first round.

Mr Bowie said he was significantly cutting the level of high-yield bond exposure in his £362m Vontobel TwentyFour Absolute Return Credit fund, with its share falling from 10 per cent to less than 4 per cent.

This was in part because of the strong performance from those risky assets, but mainly because of volatility generated before Sunday's French elections. Bond markets had been jittery before a slight relief rally today.

“I think it’s best to take some risk off the table, because we have done very well in those bonds,” Mr Bowie said.

The 10 per cent exposure to high yield, which is the maximum allowed in the fund, stemmed from a buying spree the manager embarked on in early 2016, when concerns about the solvency of Deutsche Bank led to the indiscriminate selling of risky bonds.

He said he had picked up a Nationwide contingent convertible (coco) bond with a 12 per cent yield. The bonds are deemed risky because they can be converted to equity or have their coupon cancelled if the issuer falls into financial distress.

The high yield was due to turmoil in the coco market stemming from Deutsche Bank’s troubles, but Mr Bowie said Nationwide was in no way related to the German bank and, with a tier 1 capital ratio of more than 20 per cent, was not in any danger of defaulting.

The Nationwide bond has since risen in value, with its yield falling to 6 per cent. The high-yield exposure has helped the TwentyFour fund deliver an unexpectedly strong performance in the past 12 months.

Since its launch in August 2015, the TwentyFour fund has returned 7.6 per cent, data from FE Analytics shows. This figure dwarfs that of the other absolute return bond strategies within the IA universe in the same period.

Mr Bowie said he had been surprised by the performance of the fund during a “quite volatile period for the market”, with the bond sell-off at the start of 2016 and the uncertainty surrounding Brexit and Donald Trump’s election later in the year.

The manager said the performance had justified TwentyFour’s decision to launch a long-only absolute return bond strategy, without the ability to short the market typical of such funds.

He added that the UK remained “very attractive” from a bond market perspective in spite of the uncertainty around Brexit. Nearly three-quarters of the portfolio is currently invested in UK fixed income.

“I like the UK so much because I would argue Brexit is largely in the price – I think we are being compensated for the risk,” Mr Bowie said.

“For the first time in years you are getting the highest spread in the UK [as opposed to the US or Europe].

“There is still risk in Brexit, but there is risk in Europe and the US as well. There is no risk-free option.”