Peter Baum and Nicola Marinelli have already made significant portfolio changes since their MFM Glendevon King Global Bond fund launched in January.
Earlier in the year, 50% of the fund’s portfolio was invested in bonds issued by financial institutions and the rest invested in corporate and government debt. Today, 80% of the portfolio is invested in financial issuers.
Between January and March, corporate results in America turned out to be much better than expected. This led many investors to rush into corporate bonds, not only those issued by American corporates but also those based in other countries.
“Because the corporate results coming out of America were very good and investors have a herd mentality, they started to invest in corporates world wide,” Baum says.
Consequently, corporate credit spreads fell. “We had a period where corporate spreads were far too tight,” Baum adds. (article continues below)
Investors started selling their financial bonds, which created selective opportunities for Baum and Marinelli.
“We discovered a particular sweet spot that was so oversold it became a must have in our portfolio,” Baum says.
Some of the names they added to their portfolio included insurers such as Prudential, Legal & General and Scottish Widows. They also added Nationwide, Citicorp, Co-operative Bank and other BBB and A rated bonds.
“We discovered a particular sweet spot that was so oversold it became a must have in our portfolio”
In turn, they sold several Greek bonds as well as Vodafone, WPP and other BBB rated bonds.
Baum says unique market conditions created a situation where they were able to buy bonds at prices last seen in the mid-1970s and 1980s. As sterling interest rates were low, and predicted to stay so for some time to come, Baum says fund managers could buy “good quality names at huge discounts”.
When selecting bonds for their portfolio, he and his co-manager search for bonds that offer them a cuponing income of 5-8% and are trading at a discount so low that they can expect 3-8% capital gain.
The 80% in financials and 20% in corporates split has benefited the portfolio significantly over the past couple of months, Baum says.
More recently, the decision on Basel III and the increased likelihood of low interest rates and good corporate results have boosted the performance of the fund. Credit quality, Baum says, has remained constant or improved as financial institutions are repairing their balance sheets while the market has started to recongise their value.
Less corporate issuance and more bond fund inflows have helped to create a temporary supply/demand imbalance resulting in spread tightening. The financial bonds, which now account for 80% of the portfolio, benefited not only by the market acceptance of Basel III but also by the desire for relatively high yielding fixed income opportunities.
According to the latest fund fact sheet dated October, almost 40% of the portfolio is invested in BBB rated, 35% in A rated, 21% in BB rated and 4.1% in AAA rated bonds.