Tag Archives: corporate

Fund Manager Briefing: TwentyFour Corporate Bond

By Jake Moeller Lipper’s Jake Moeller reviews highlights of a meeting with Chris Bowie, Portfolio Manager, TwentyFour Corporate Bond Fund , on August 26, 2015. The new TwentyFour Corporate Bond Fund is the sister of the highly successful (and Lipper Award-winning ) TwentyFour Strategic Bond Fund . Launched only in January 2015, the fund is designed to perform against a relative benchmark (TwentyFour will shortly launch an absolute return bond fund) and is not slavishly devoted to maintaining a high yield. Mr. Bowie is a fund manager obsessed with liquidity. “You won’t find any private placements or unrated securities in this portfolio,” he stated. “I like quality and I want a small, compact portfolio.” Indeed, this fund is refreshingly compact. With only 70 securities, it is very small compared to some of the large corporate bond funds occupying the U.K. market, and Mr. Bowie doesn’t expect his fund will likely hold a significantly larger amount of holdings. In a credible move TwentyFour has recently stopped marketing its Strategic Bond Fund (at £750 million) to new clients in order to prevent pressure to increase the number of lines. TwentyFour has undertaken to similarly protect the Corporate Bond Fund from capacity constraints, should that need arise. The fund is designed along similar lines to Mr. Bowie’s previous Ignis Corporate Bond Fund , with an emphasis on delivering risk-adjusted returns across all sources of alpha, including duration and yield curve, stock selection and assets, country rating, and sector tilts. Mr. Bowie has an excellent pedigree in all aspects of corporate bond management and carries an enviable performance track record, once ranked by Citywire with the fourteenth best Sharpe ratio of all funds globally. Table 1. Composite Performance* of Chris Bowie from December 31, 2008 to Present within IA £Corporate Bond Sector Quartiles (click to enlarge) Source: Lipper for Investment Management. As a former computer programmer, Mr. Bowie has built his own system for examining risk/return that gives him some unique insights, particularly in constructing his credit buckets. “My system calculates a risk-adjusted return metric for every single bond,” he states. “This examines the last three-year cash price volatility for a bond and compares it to its current yield. If a bond is yielding 5%, but its three-year cash price volatility is 7%, that is quite a poor investment. If it is yielding 4% but has cash price volatility of 2%, this is much more attractive.” The fund has a very large position in BBB-rated securities at a whopping 44% (compared to the sector average of 38%) and a large component of BB-rated debt (16%), mainly around the five- to ten-year part of the curve. Mr. Bowie is also keen on corporate hybrids, with a 12% exposure there. “They’ve been good for us,” he states. “We have been selectively overweight for a while now.” Using his proprietary value system, Mr. Bowie cites the example of his preference for a Barclays Upper Tier 2 position that appears to have the wrong cash-price volatility for its rating. “It’s a no brainer!” he states. “If you buy the Barclays BBB on the same yield, you’ve increased your cash-price volatility three times for a single notch improvement in credit rating.” Table 2. Comparative Performance of Various Asset Class Proxies since 2000. (click to enlarge) Source: Lipper for Investment Management. Past performance does not guarantee future performance. For a fund manager whose week has just commenced with the “Black Monday” selloff in global markets, Mr. Bowie is strikingly calm and composed. “It’s not yet a solvency event,” he states. “This is a big question about growth.” While his tone is reassuring and his longer-term investment thesis is relatively intact, he does concede the crisis has warranted a few changes to his positions. He has just increased the duration of his portfolio from 7.1 years to 7.4 years (the sector average is 7.5 years) on the back of the selloff in Treasuries on Wednesday, August 26. This has created a partial hedge against the credit risk in some of his higher-beta names. He has also sold a small amount of his AT1 (additional Tier 1) bonds to further bring down his beta. “We expect further short-term volatility in equities markets,” he states, “and we don’t want to be selling bonds into the cash market. But we do want to mitigate some credit volatility.” While Black Monday hasn’t forced a redesign of Mr. Bowie’s overall strategy, it has placed emphasis on the outlook for inflation. “Until a week ago I thought the most likely thing was that the Fed would raise rates in September, the Bank of England following suit in Q1 next year, that we would have a normal recovery where inflation starts to gently rise, and we would see wage pressures elevate.” he states “But now, I’m wondering with what’s happened to oil and volatility and the noise out of China whether deflationary risk is more of a threat.” This concern comes despite Europe’s supportive quantitative-easing program and increasing business confidence and is also reflected in the fund’s duration increase outlined earlier. Table 3. Proportion of IA Sterling Corporate Bond Sector by Fund Size Ranking Source: TwentyFour AM. Data as at April 2015. The fund currently holds 14% exposure to gilts and supranationals. Mr. Bowie is well aware of outflows from competitors’ funds in the sector and the potential for investors to undertake a broader rotation out of corporate bonds. The gilt position and the high level of highly rated names is protection for him, should this occur. He argues, however, that corporate bonds should be an ongoing component of investors’ portfolios, with the long-term performance profile (even including 2008 – see Table 2, above) measured by the iBoxx Non Gilts BBB Index since 2000 offering considerably better performance with lower volatility than equities. He notes also that there are some headwinds for the asset class, but an active fund that examines the drivers of volatility is best placed to protect capital. There are many things going for this new launch. TwentyFour is a vibrant fixed income specialist that has made a canny hire in Mr. Bowie. His pedigree is strong, and-although he is running what is currently a defensive portfolio-his unique processes bring a fresh dynamic. Furthermore, the concentration of flows in the sector (see Table 3, above), with 70% of the entire sector contained in the ten top funds, should be of concern to all investors. A small and nimble fund has much to offer. * The composite is constructed in the private asset module of Lipper for Investment Management as follows: Ignis Corporate Bond Fund from 31/12/2008 – 30/6/2014, IA £Corporate Bond sector from 1/7/2014 to 13/1/2015 & TwentyFour Corporate Bond from 14/1/2015 onwards.

3 Bond ETFs To Generate Income For Your Portfolio

Though investors have been continuously shifting their exposure to the equity world in the second half of the year thanks to a steadily improving U.S. economy, the fixed income world is also in great shape as a result of global market turmoil. The Eurozone is at a risk of facing deflationary woes after escaping recession almost a year ago. The economies of China and Japan have also dealt a blow to the global investing market and kept the risk quotient on even after the U.S. economy’s tantalizing Q2 growth of 4.6% and Q3 growth of 3.9%. All these issues have kept interest rates low this year despite the QE wrap-up in October. The yields on 10-Year U.S. Treasury note have fallen 25 bps to 2.24% (as of November 26, 2014) since the start of the year. Though short-term interest rates are likely to rise next year, long-term yields are subdued at the current level and are expected to remain so. An increased economic stimulus in Japan, the surprising rate cut in China and the potential announcement of the QE measure in the Eurozone with interest rates at rock-bottom levels will inject cheap money in the global economy and suppress long-to-medium-term interest rates. On the other hand, volatility levels might pick up in the days ahead as the S&P appears overvalued, having hit all-time highs more than 45 times this year and global growth remaining weak. Commodity markets continued their sluggish trend causing some to shift to low risk securities like bonds. This is especially true with the latest U.S. spending data coming in a little soft. The business spending plans indicator declined for two months in a row in October. Consumer spending nudged up just 0.2% in October despite multi-year low gasoline prices. Poor wages seemed to be the victim of such subdued numbers, per Reuters . With falling Treasury bond yields, relatively high-yield products look more attractive in the near term, at least to investors who are hungry for income. And should this broad market trend continue, moderately higher yield bonds and the related ETFs could put up a strong show and help investors to protect their portfolio as well as earn higher levels of income. Below we have analyzed three ETFs that investors could consider in this mixed kind of an environment where equities are witnessing a bull run. However, there is an associated risk of an imminent correction, or at least high levels of volatility. This urges investors to save a portion of their portfolios for fixed income. After all, even if markets end up in the red to close the year, a solid yield of about 4% should definitely help to withstand volatility. First Trust Tactical High Yield ETF (NASDAQ: HYLS ) The fund seeks to provide current income by investing primarily in a diversified portfolio of below investment-grade or unrated high-yield debt securities . Though capital appreciation is its secondary motive, it has added a bit this year, gaining 3.7% YTD.. The product thrives on long-short strategies. Net weighted average effective duration (considering the short positions) is 2.96 years indicating low interest rate risks. The fund is meant for an intermediate term as evident from 6.42 years of weighted average maturity. The product is expensive with an expense ratio of 1.28% per annum. Volume is light, trading in less than 35,000 shares per day that ensures extra cost for the product in the form of a wide bid/ask spread. The fund yields 4.93%. SPDR Barclays Long Term Corporate Bond ETF (NYSEARCA: LWC ) With an asset base of over $305 million and an average trading volume of roughly 100,000 shares, LWC is among one of the less popular funds in the corporate bond space. The fund tracks the Barclays Long U.S. Corporate Index to provide exposure to long-term corporate bonds. As such, the fund has a weighted average maturity of 23.89 years and an average duration of 13.85 years. The fund currently holds a well-diversified basket of 1,180 investment grade securities. Sector-wise, Industrials dominate the fund with a little over three-fourths of fund assets, followed by Finance and Utility with 19.6% and 13.04% allocations, respectively. The fund is a low-cost choice with 15 basis points as fees and has a 30-Day SEC yield of 4.26%. LWC is up 15% this year. PowerShares Fundamental Emerging Markets Local Debt Portfolio ETF (NYSEARCA: PFEM ) This emerging market fund seeks to provide exposure to high-yield bonds of various investment grades. Per the S&P, A and BBB-rated bonds take 30% of the portfolio each followed by AA rated bonds (21%) and BB rated bonds (13%). The fund presently holds 40 securities, targeting the intermediate part of the yield curve. The ETF has an average maturity of 7.18 years and an effective duration of 5.11 years. Country-wise, Brazil, Indonesia, Russia, Mexico and South Korea each occupy assets in the range of 7.5% to 9.7%. The fund charges 50 basis points as fees and has a 30-Day SEC Yield of 5.20%. The yield to worst came in at 5.74%. The fund manages a small asset base of $4.1 million and is relatively illiquid with average trading volume of roughly 1,000 shares a day.