Kames Capital  

Kames' Snowden bemoans the lure of passives

Kames' Snowden bemoans the lure of passives

Kames Capital's Stephen Snowden has declared passive fixed income his "new enemy" as he admitted his asset class, corporate bond funds, remained unpopular among investors.

Mr Snowden, who is co-head of fixed income at Kames, said the vast majority of wealth managers have the minimum amount of corporate bond fund exposure they can get away with.

Net retail sales of the IA Corporate Bond sector were £139m in November 2017, according to figures published by the Investment Association, but sales of the IA Strategic Bond sector hit £1.5bn in the same month.

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The IA Global Bonds sector was also more popular, with net retail sales of £177m in November.

Mr Snowden, who is manager of the £1.5bn Kames Investment Grade Bond fund, suggested active corporate bond fund managers have had little duration, or interest rate, risk in their portfolios.

He noted one of the reasons investors had avoided buying the asset class was because of the supposed interest rate risk it exposed them to.

But the manager warned investors who may have fixed income exposure via passives that products, such as exchange-traded funds, often had "double squared" the amount of duration risk.

He added, passive fixed income products were "not as cheap as you think", referring specifically to exit fees.

But Dennis Hall, chartered financial planner at Yellowtail Financial Planning, said: "I think that an active manager is treading on thin ice when they talk about things not being as cheap as people think.

"Passive products are cheaper than comparable active funds, but whether active or passive, the fund industry hasn't really covered itself in glory when disclosing fees and costs.

"There is some truth that ETFs are not necessarily as cheap as people think, and investors need to choose their providers carefully, but that’s always been the case regardless of whether an ETF or a fund."

Mr Hall revealed he does generally use passives to get fixed income exposure, with his greatest weighting to short dated bond funds and index linked.

He said: "Corporate bonds make up the lowest allocation and, again, we are generally looking for short duration from investment grade bonds. 

"Fundamentally, we want to use the bond allocation as a diversifier and portfolio insurance so we don't want to invest in long dated corporate bonds that are as risky (or riskier) as equities, and which display a similar correlation."

European-listed fixed income ETFs/ETPs gathered net inflows of $24.9bn (£18bn) in the year to the end of December 2017, according to research consultancy ETFGI.

Mr Snowden, who has previously said he hoped for a sell-off, acknowledged yesterday (17 January) that he was not going to get a sell-off.

Instead, he predicted they would be "looking at a low-yielding environment for a long time".

But John McNeill, head of rates, fixed income at Kames, believed volatility would be more of an issue in 2018, after the record low levels of volatility seen in equity markets in 2017.