M&G launches floating note fund for Tomlins

M&G will launch a world-ranging floating rate high yield fund for James Tomlins next month.

The M&G Global Floating Rate High Yield fund is will launch 11 September, Tomlins says. It will invest in the still maturing global floating rate note market, which has shown lesser volatility than high yield and investment grade markets in the past, especially during the taper tantrum.

The ongoing charge figure for the fund will be 2.07 per cent.

“Because it doesn’t have this interest rate sensitivity, it was quite immune to the sell off,” Tomlins explains.

He expects a “rapid” rise back to 3 per cent in the UK and US, with them hitting that point in July 2017.

“The challenge for bond investors is how to conserve capital and continue to make good returns,” he says

Retail investors have been able to invest in leveraged loans through closed-ended vehicles, but not through open-ended funds. Another option has been shorter-duration high yield funds, however Tomlins believes they are inferior to floating rate bonds.

 “Credit risk is broadly similar, however short duration merely limits the interest rate risk. The FRN’s interest rate risk is effectively zero.” 

All things being equal, over a year that sees a 0.75 per cent rate rise six months in, the FRN strategy will have a 4.7 per cent total return. A short duration fund would deliver just 3.2 per cent, he says.

Because floating rate bonds offer a fixed credit spread above Libor, a widening of the measure will cause capital loss. The model portfolio’s spread duration is currently 1.92 years.

“The best conditions for this fund are stable to tightening credit spreads with rising interest rates and low defaults, if that’s your view then this fund will outperform,” Tomlins says. 

The FRN market is skewed toward Europe which makes up 57.5 per cent, the UK accounts for 20.8 per cent and the US 16.7 per cent.

The fund will use credit default swaps, and fixed-rate bonds alongside interest rate swaps, to increase its investable universe. There are just 115 FRN issuers worldwide.

It will try keep the true floating rate note exposure above three-quarters of the portfolio. The fund will be hedged to US dollars.

Tomlins’ deputy on the fund will be Stefan Isaacs.