Best in Class: the TwentyFour Absolute Return Credit fund
The Investment Association Targeted Absolute Return sector has been heavily maligned in recent months, as it faces a raft of challenges and questions about performance.
Complexity and volatility have led to uncertainty, and it is now a sector which is firmly out of favour, with almost £4bn of assets pulled from it in the past six months alone.
But divesting en masse is to me a mistake: there are still a number of very good funds in the sector which can perform very specific roles in a portfolio.
Simpler usually means better when it comes to absolute return funds and that is precisely what this week’s best in class fund is.
The TwentyFour Absolute Return Credit fund aims to achieve a positive absolute return in any market environment, with a modest level of volatility, over a period of three years.
Crucially, this fund has been designed to be easy to understand and does not 'short' stocks or borrow any money to boost returns.
Risk control and capital preservation is at the heart of fund. One of its central objectives is to keep volatility very low (less than 3 per cent).
This is achieved by tightly managing the fund's interest rate and credit risk. The fund’s specific performance target is to achieve a return above Libor plus 250 basis points after fees.
The fund has been managed by Chris Bowie since launch in August 2015.
Chris was previously head of rates at Aegon and head of credit at Ignis. In total he has well over 20 years' experience in fixed income.
Chris also has the support of portfolio managers Gordon Shannon and Graeme Anderson and two portfolio assistants.
The core of the portfolio is invested in investment grade bonds and floating rate securities, which are due to mature within a few years.
Most of these bonds will be held to maturity to cut down on trading costs.
Up to a third of the fund can also be invested in other fixed income securities such as government bonds or high yield bonds, if suitable opportunities arise.
Currently over half the portfolio (56.1 per cent) is held in BBB bonds.
Chris uses his expertise and TwentyFour's proprietary "Observatory" system to find the best low-risk opportunities in the bond universe.
The fund is unconstrained by geography and will look across the UK, US and Europe for the best ideas, although all positions will be hedged back to sterling to remove currency risk (74.8 per cent is currently held in the UK).
With low volatility and capital preservation the main building blocks of the portfolio it is no surprise to see Chris remaining cautious at present, despite his belief the market remains supportive of credit.
With volatility expected to remain in the near-term, the team are maintaining low spread duration levels while interest rate duration is now a full year lower than duration at launch.
Just over one fifth (20.9 per cent) of the portfolio is expected to mature in the next 12 months, with a further 47 per cent maturing in the next one to three years.
Crucially, performance has matched the mandate. In each rolling 12-month period to the end of April 2019 the fund has produced a positive return, it is up 10.6 per cent over the past three years and and it is up 12.6 per cent since launch.
The fund has an estimated ongoing charge of 0.56 per cent, which is very low for the sector and it carries no performance fee.
It is refreshing to see a fund like this in a sector which has become increasingly synonymous with complexity and leverage.
It has delivered predictable, positive returns, with low volatility and low drawdowns.
TwentyFour is one of our favourite houses for fixed income in general and the consistent risk-adjusted returns delivered by this fund reinforce that belief. It is a strong candidate for any investor looking for not just a defensive absolute return fund but also a core fixed income holding.
Darius McDermott is managing director of Fundcalibre
