Last year was, in a way, a pleasant surprise for bond investors as market uncertainty offered a window of opportunity to make big gains for the first time in a decade.
Unfortunately, that window was small and has now been firmly shut. Bonds are expensive again, having gone back to pre-pandemic levels – with yields at historic lows.
Inflation is also proving stickier than many expected with discussions of interest rate hikes sooner rather than later becoming more common. This is particularly painful for the bond market, where hikes can eat into capital.
However, fixed income is always going to be an integral element of any well-diversified portfolio, so we need to find solutions. The dearth of income is no doubt a concern, but there are still options for those looking for a total-return-type offering – and that is where this week’s fund stands out.
Nomura Global Dynamic Bond is an unconstrained strategic bond fund, with a focus on total returns. It is managed by the charismatic Richard ‘Dickie’ Hodges, who joined Nomura in 2014 from Legal & General, where he ran the similar L&G Dynamic Bond Trust.
Hodges takes an unconstrained approach, using the full range of bond and derivative securities available. The goal is to deliver a yield well in excess of cash, but with capital growth too. He aims to do this while generating less volatility than bond indices.
The process is a blend of top-down and bottom-up stock selection. Hodges first wants to understand the big global economic picture, which he does through macro-economic analysis. The bottom-up process then sees him select the securities to reflect this view.
The process allows him and his team to be dynamic through short-term market risks and trends, while keeping these in context of the broad world outlook. Step one is to build a medium-term view of the world. Hodges wants to understand the broad interest rate cycle and what the economic and corporate fundamentals are saying about the state of the world.
Step two is to find any short-term opportunities that may exist by spotting idiosyncrasies in markets and identifying areas of risk. This will throw up speculative positions in valuations, as well as catalysts for change. Step three is to identify the best securities to exploit such opportunities, judged on their risk/reward trade off.
Risk measures are built into the portfolio management and construction throughout the process. There is also an independent risk management team that will monitor the portfolio daily – this allows the manager to have a constant idea of what risk he has taken already.
The fund’s investment universe is vast, and positioning can move around considerably and quickly. Hodges can and will hold investment-grade (including government) bonds and high-yield bonds. This includes the use of financial debt and convertible bonds if opportunities exist. The minimum rating for a holding will be B-, but the portfolio can hold unrated bonds if the manager believes they would be above this level should they be rated.
When looking for ideas to fill the portfolio, the team looks at stocks through a yield lens, but with a total-return mindset. This means the portfolio will target a yield of around 3 per cent to 5 per cent, though this can vary depending on market conditions.
The fund has returned 36 per cent in the past five years, almost double the average returns of its peers in the IA Sterling Strategic Bond sector. The fund has an ongoing charge of 0.7 per cent.
A sector as vast as the strategic bond one needs a manager who has the rare ability to accurately read the economic environment, as well as pick individual investments. Hodges has repeatedly shown he is capable of doing both through this flexible mandate, making it an excellent option for all market conditions.
Darius McDermott is managing director of FundCalibre
