Bryn Jones is among the managers that were affected when the Financial Services Authority (FSA) blocked Lloyds and Royal Bank of Scotland from paying back their bondholders with bailout money from the taxpayer.
Jones’ £40m Rathbone Ethical Bond fund has a natural bias towards financials because its ethical criteria prevents it from holding oil, miners, utilities and other stocks in popular sectors. At the moment it has about 60% in banks and insurers.
Going into the credit crisis, Jones says the fund had a reasonable weighting to financials, which caused it to struggle.
“But at the start of this year we took the view that financials were cheap so we added subordinated bank debt and preference shares. This was the right call to make as these assets have seen significant upside – tier one debt has risen 300% to 400%,” Jones says.
Now the manager is considering taking profits on some of the positions that have moved a long way up, he says.
He concedes that the fund’s holdings in RBS and Lloyds means it will be impacted by the FSA’s ruling, but he says this has been priced into the bonds. “When they are trading down at 60p a lot of it is in the price,” he says. “But it will damage the income stream so we don’t want to be too exposed.”
Jones has bought ANZ, a New Zealand bank, and BNP Paribas, for their secure equity dividend. He adds: “We have invested in an equity settle from Lloyds and RBS, which is an interesting way of playing the situation.”
Jones is also finding opportunities among new issuance in the bond market. “Companies looking for working capital come to the credit market [instead of the equity market] because there is huge demand for corporate bonds. Every issue that has come to market has been oversubscribed,” he says.
Among the insurers he likes are Amlin, Aviva, and QBE, all of which have strong balance sheets and good management teams.
In other sectors, Jones likes social housing organisations such as Quadrant, a provider of social housing finance, and Places For People, a property developer and manager.
He has several other real estate-linked holdings such as Broadgate and Hammerson. “Hammerson have been going through a tough time but we thought it was quite interesting what they have been doing, they’ve got good yields, and now the property market is picking up we are even more comfortable holding those assets,” he says.
Over the coming months Jones will look at the renewable energy space for stock ideas. “We have been looking at solar energy ideas but they don’t have the right structure for the fund. We have been putting pressure on companies to issue climate or energy efficient bonds,” he says.
At the duration level, Jones has pared back his duration exposure in the view that monetary stimulus measures will be inflationary. “We will also look to de-risk in the next 12 months,” he says, which will mean cutting back on lower quality holdings such as the BBB minus rated Marks & Spencer, in favour of higher rated bonds.