The liquidity issue
The problem of liquidity in the bond markets, which has been magnified since the tighter regulation introduced after the global financial crisis, is something TwentyFour has taken seriously since its inception.
The firm’s flagship Dynamic Bond fund soft-closed after it reached the £750m mark in order to avoid liquidity issues further down the line without negatively impacting on returns. TwentyFour Corporate Bond fund, meanwhile, has a capacity of £2bn.
And his funds have special restrictions on holding less liquid bonds. The Corporate Bond fund is not allowed to buy private placements or unrated bonds, for example.
They also contain fewer holdings than many peers’ products.
Currently, there are 92 holdings in the Corporate Bond portfolio.
“I will never own more than 100 bonds in my portfolio,” says Bowie. “Things change in credit, companies fall in and out of favour, and when I want to sell a company, I don’t want to own so much of it that I can’t get out.”
That is why it was especially satisfying for him to go toe to toe with the FCA after it published an academic report in March of last year, claiming the market had become more liquid in recent years, not less.
In addition to penning a “cheeky” blog post challenging the paper’s methodology, Bowie went one step further, extending an invitation to the paper’s authors to witness him trading in action. Much to his surprise, they accepted.
He says: “I tried to buy the bonds they said were the most liquid, and I couldn’t buy them. Four banks were showing prices on that bond, saying we could buy one million at that price. But when I contacted each of the banks, they had none they could sell me. At that point, the regulator realised its academic paper was based on trades that happened on a subset of the credit universe.
“Our point to them was that they are asking the wrong question. The question isn’t what happened with the trades that actually happen but rather, what about the trades that didn’t happen?
“The problem we have is liquidity can be fickle in these markets. You can have perfectly good liquidity one day but on the fourth day of that week, you might try to sell a bond and not be able to do it.”
Having a more concentrated portfolio also benefits him in the current climate because it allows his funds to be nimble enough to focus on stock selection alpha.
