Between June 2009 and June 2012, the IMA’s sterling fixed income sectors have grown by 11.5% annually with the larger funds being the biggest beneficiaries. At the end of June, Richard Woolnough’s M&G Strategic Corporate and Corporate Bond funds held £5.2bn (£5.6bn at the end of August) and £6.3bn (£6.6bn) respectively.
Kate Hollis, global head, fixed income/alternatives fund management research at S&P Capital IQ, said that those managers she interviewed had bought bonds denominated in dollar, euro, Swiss franc and Norwegian krone with some “dipping into” emerging market currencies.
She added: “Nearly all the funds we reviewed fully hedge their non-sterling exposure. Invesco’s UK Investment Grade Bond Fund and M&G’s Corporate Bond Fund and Strategic Corporate Fund are the only funds we review that have taken active currency bets.
During the most recent 12 months – the focus of the S&P Capital IQ research – liquidity has received a great deal of attention, with the FSA surveying corporate bond managers to see how they were affected.
“Liquidity has not necessarily improved in the past year,” Hollis said. “This time last year managers told us that the market was either buying or selling on any particular day, and on the whole this has not changed. Managers need higher conviction when buying credits, as the likelihood of holding until maturity has increased.”
This is not necessarily an issue for all managers with Woolnough, for example, more concerned with the ability to add value through stock selection.
According to Hollis: “M&G has tried to limit flows into these funds by persuasion rather than closing the vehicles – although not in the case of the M&G Optimal, which is larger but has a wider investment mandate.”
Duration has been another difficult call in the past 12 months with yields disappearing along the curve propping up performance for funds using gilts to manage duration.
“Benchmark-measured funds we reviewed have generally stayed neutral to their index,” Hollis found, “with some going slightly short, which has cost them performance. Strategic bond managers have negative duration on the parts of their portfolios that are sensitive to interest rates.
“John Pattullo’s Henderson UK & Europe Funds – Strategic Bond Fund is the only fund we reviewed that had a long duration position this year, and it had proven to be successful.”
