Multi-asset specialist Anthony Gillham has turned to fixed income managers with higher-quality credit exposure and high-yield vehicles with shorter duration, following strong returns from the racier end of the bond market.
Mr Gillham, who manages Old Mutual Global Investors’ £975m Creation range in his role as co-investment director for multi-asset, said he had turned to funds that bought investment-grade debt – such as Wellington Global Credit Plus – on the view the space looked more attractive than riskier bonds.
The manager also moved some money from the Wells Fargo US High Yield Bond fund to a shorter-duration equivalent – Wells Fargo US Short Term High Yield Bond.
“We have gone from full-duration high yield to shorter [duration], and now we think better value is in investment grade,” he said.
“If you look at expected defaults, we are getting a better risk-adjusted yield.”
Mr Gillham originally turned to Wells Fargo US High Yield Bond in early 2016, spotting a buying opportunity amid market concerns about both the health of energy companies and market liquidity. This followed on from a period in which the gating of a US-based credit fund unsettled investors.
He explained: “We thought the value case for high yield was good, given the energy crisis. There was a bit of contagion across US high yield. In the first and second quarters of 2016 we started to focus on the US.”
However, an improvement in conditions prompted Mr Gillham to take profits in late 2016, with the manager seeking a more defensive level of duration.
“We took profits on that exposure but stayed overweight high yield, and moved [into] shorter-maturity bonds,” he explained.
“Wells Fargo US High Yield Bond gave us exposure to traditional high yield. When the value anomaly started to compress we went shorter maturity.”
High-yield debt returns have far outstripped those produced by investment grade since the start of 2016.
Over this period the Bloomberg Barclays US Corporate High Yield index has gained 24.3 per cent in sterling terms, versus 11.1 per cent by its investment-grade counterpart, data from FE Analytics shows.
Elsewhere in his portfolios, Mr Gillham has invested in another fund from a US-based asset manager: the BNY Mellon US Equity Income strategy that launched earlier this year.
“They have a value tilt to what they do,” he said.
“Value continues to plumb the depths. With value it has been difficulty to identify managers who have consistently generated returns. [Manager] John Bailer is a value guy but can iron out some of the more extreme peaks and troughs.”
He said that the fund’s exposure to banks served as a “good portfolio hedge against rising bond yields”.
In a similar nod to potential economic improvements, Mr Gillham has been investing in BlackRock’s Natural Resources Growth and Income vehicle, in an attempt to hedge against inflation.
“The volatility [in this fund] is going to be a function of commodities but it will give me a good inflation hedge, which is important. It gives a nice spread in terms of allocation to energy but also to different commodity companies,” he added.
