Nomura’s Dickie Hodges turns to cash amid market volatility

For Nomura’s Richard “Dickie” Hodges, bonds are in his blood. He runs the Global Dynamic Bond fund and is widely regarded within the industry as a fixed income star.

Hodges recalls visiting, at the age of five, Laurie Milbank, the stockbroking firm his father worked at, and being impressed by the “beautiful” bond books with their gold leaf edges, and the stock ticker on a computer “the size of a wall”.

“I always wanted to go into financial markets,” Hodges says. In 1987 he joined Chase Manhattan, which had bought Laurie Milbank as well as another stockbroker, Simon & Coates. “I saw Black Monday. It just looks like a blip now,” Hodges says of this time.

Two years later Hodges joined Gartmore, where he spent the next 17 years, latterly as head of pan-European fixed income. In 2006 he left the firm to join Gartmore’s former head of fixed income, Roger Bartley, at Legal & General Investment Management, tasked with launching the Dynamic Bond trust.

“It was one of the first, if not the first, strategic unconstrained fixed income funds,” he says. When he left LGIM for Nomura Asset Management in 2014, the Dynamic Bond trust was a sizeable £2bn, but it had had a rather inauspicious start, launching in April 2007, when trouble was brewing in the global markets.

“I have an amazing ability in setting up funds at the beginning of a disaster in the markets,” Hodges jokes: “2007 was a difficult year and 2008 was harder for everyone.”

He spent 2008 reducing risk, shorting cyclical companies and moving to long duration, then ramped up the risk going into 2009, investing in cyclical companies deemed by the market to be at risk of default. In 2009 the fund reaped the rewards, rising 43 per cent.

However, after seven-and-a-half years at the helm of the Dynamic Bond trust, Hodges says he became frustrated.

“I wanted to launch other products but Dynamic Bond was such a successful product there wasn’t appetite. The fund was only available to UK retail investors and it was £2.3bn but it should have been two or three times that size. I wanted access globally for investors to get involved.”

Hodges adds that changes were made within senior management that were not in the interests of the retail side of the business. “LGIM decided to focus more on institutional than retail, which worked very successfully, so I wouldn’t criticise them.”

In November 2014 Hodges joined Nomura as head of unconstrained fixed income, with the Global Dynamic Bond fund launching in January 2015.

“Nomura is one of the strongest Far Eastern brands, with distribution capabilities and resources; there is a huge team,” he says. “I saw the Global Dynamic Bond fund as a key platform, especially if there are broad-based rises in rates.”

This strategic core portfolio typically consists of 100-140 individual bonds and accounts for at least 80 per cent of the assets of the strategy.

The fund takes an unconstrained approach with a total return objective. Although there is no specific target, the aim is to deliver stable returns and income by investing in debt securities and managing interest rate risk.

Ben Bugg, who had previously worked with Hodges at LGIM, initially joined Nomura as an assistant manager on the fund, focusing on hedging and risk management, but left the firm in September to join UK Bond Network, a platform that facilitates lending between high-net-worth investors and UK businesses. Hodges is currently looking to replace Bugg in some capacity, as well as hire a dedicated high-yield analyst or manager in the near future.

The fund is still “tiny” Hodges says, with $110m (£75m) in assets under management, which is unsurprising given the vast outflows global bond funds have seen in the past year.

Since launch, the fund has lost 1.8 per cent, against the 1.5 per cent fall in the FO Fixed Interest Global sector, according to FE.

With market turmoil rife, Hodges spends most of his time hedging risk in the portfolio, treading the fine line between protecting capital and not stifling income. There is no target income, but the fund is currently yielding 3 to 3.5 per cent.

“There is a risk of volatility rising,” he says. “The Dax was up 10 per cent last year and it is down 8 per cent this year. So I am putting hedges in place. It is one of the most important things to do.”

Hodges currently has a weighting of 36 per cent in financial bonds in the core portfolio, but with a hedged position of around 50 per cent the net exposure is actually only 14 per cent.

“I need that large a hedge to mitigate prices falling. It is a lot less risky to be short. I am hedging across all asset classes,” he says.

Alongside the position in financial bonds, Hodges holds 23 per cent in high yield, 18 per cent in government debt, 7 per cent in convertible bonds, 6 per cent in investment grade corporates and 10 per cent in cash.

He has hedged 87 per cent of the port-folio’s credit risk and 80 per cent of the fund’s interest rate risk, while from a risk perspective, he says he has taken the portfolio to its lowest ever level. The fund’s value at risk – a statistical measure of probability calculated using timeframe and the maximum losses anticipated – is 1.2 per cent, compared to its maximum limit of 5.75 per cent.

Hodges says the correlation between asset class returns is close to peaking and goes as far as to say he “wouldn’t invest in any asset class except cash”.

“We are getting closer to everything returning the same as yields are the same. Equities are the ultimate long duration asset. They can be affected by interest rates even more.”

But Hodges does not think interest rates will be shooting up any time soon. He points out that Goldman Sachs, Merrill Lynch and Citigroup have all put their predictions for UK rate rises back until the second half of 2016, although he believes we are looking at 2017 before we start to see UK rate rises.

“I don’t think the UK will raise rates this year,” he says. “In the UK there is a potential vote on Brexit in May 2016. I would be surprised if the government raises rates ahead of the vote on Brexit. Why raise rates? Inflation is not a problem. It will be at some stage, but it isn’t yet.

“I am very overweight UK interest rates to December 2016 and very short UK interest rates from December 2017. I think rates will be lower for longer.”

Hodges adds that the only reason the Fed raised US rates in December was to try to prevent further shocks to the market.

“The minutes from the Federal Open Market Committee were very doveish. But if the Fed hadn’t raised rates it would have lost complete credibility. It would have caused instability,” he says. “Four rate rises have been priced into the capital markets for 2016, but we will be very lucky to see two.”

CV

1987
Joined Chase Manhattan

1989
Joined Gartmore, where he stayed for 17 years

February 2006
Joined Legal & General Investment Management

November 2014
Joined Nomura Asset Management