Credit/bond opportunities funds

aroominyork

Could someone please explain what opportunities funds are? I cannot find a sensible and understandable explanation when googling.

bowlhead99

aroominyork wrote: »

Could someone please explain what opportunities funds are? I cannot find a sensible and understandable explanation when googling.

I can't really answer the question in as few words as you can ask it.

But basically, as the name suggests, such funds invest opportunistically into such opportunities they find for investment in credit assets where they feel there is potentially good money to be made on a risk adjusted basis.

So for example rather than investing somewhat boringly in a mix of AA rated government bonds and investment-grade debt, they might do a deal to buy a portfolio of credit card balances or non-performing residential mortgage backed securities or non-conforming consumer debt or high yield bonds or second-hand SME or consumer loans for a fraction of face value and hope to collect a larger fraction of face value or sell on to someone else when conditions improve. They might scoop up some preference shares on a good yield or some convertible debt, and some of these assets might only realistically have a value as private deals rather than having a listed price on the public markets, and may or may not be hedged in respect of currency or interest rate changes.

The term "credit opportunities" is incredibly broad with the above only being some examples of what some subset of these funds might buy. Some funds will be somewhat restricted in what their stated investment strategy allows them to do, while others will have quite a wide remit to exploit special situations which they have sourced on a proprietary basis or bought at auction or new issue.

You can't tell much from a fund name. As with literally any fund, investment trust or other investment company or collective investment vehicle, your first stop is to read the prospectus, accounts and recent factsheets and previous years factsheets. When you don't fully understand it, don't invest. But then perhaps research the subject area until perhaps in some future year you do eventually understand it enough to risk money in it, meanwhile investing in other things.

Thrugelmir

Are you interested in any particular fund ?

aroominyork

Many thanks bowlhead. Couldn’t your description also apply to strategic bond funds, as they also invest across the universe? Is it that strategic funds 'boringly' stick to corporate and govt bonds while opportunities funds also look at the more diverse instruments you describe?

Adding high yield bonds to the mix, are they funds that stick to standard corporate and govt bonds at the junk/lower grade end of the spectrum, but avoiding the types of opportunities you described? And high yield opportunities look for opportunities higher up the risk ladder than 'regular' opportunities funds?

Your advice about reading accounts and prospectus is fine but I'm still not confident I can interpret them adequately, so to a degree I assume I should pick strategic bond funds where I have confidence to stick with the manager.

Thrugelmir, at the moment my bond funds are 40% M&G Optimal Income, 40% Sanlam Strategic Bond, 20% Schroder High Yield Opportunities (and a little FI in VLS80). I still have one or two misgivings:
- My only concern about M&G is its size and potential liquidity problems should there be a bond run.
- I bought Sanlam after previously holding GAM Star Credit Opportunities. GAM has risen steadily based primarily on a strategy of holding subordinate bonds largely in financials. My concern was about what happens if the tide moves against that strategy, so I instead bought Sanlam which also holds subordinates but as part of a wider strategic fund approach.
- I only hold Schroder because it was in the portfolio of the IFA I left in the summer and it looked good. It’s probably the one I am most keen to ditch as I am not confident I would know the warning signs to move out of high yield opportunities, so I probably shouldn’t be there in the first place.

bigadaj

It's primarily a marketing term and should be viewed as such.

Linton

aroominyork wrote: »

Many thanks bowlhead. Couldn’t your description also apply to strategic bond funds, as they also invest across the universe? Is it that strategic funds 'boringly' stick to corporate and govt bonds while opportunities funds also look at the more diverse instruments you describe?

Strategic bond funds mainly focus on diversified portfolios of lower risk bonds.

I still have one or two misgivings:
- My only concern about M&G is its size and potential liquidity problems should there be a bond run.

A general bond collapse is very much less likely than a general collapse in share prices. Bonds have an intrinsic value in that, provided the issuer remains in business, they guarantee both future income and future return of capital on a guaranteed date. Shares offer no such guarantees.

So a general bond collapse would require a global general collapse of a very wide range of industries. Under such circumstances your share holdings would have become worthless and ithe health of your investments would probably be the least of your problems.

aroominyork

Linton wrote: »

Strategic bond funds mainly focus on diversified portfolios of lower risk bonds.

That seems at odds with bowlhead (not that he's the font of all knowledge, but then again...). My understanding of bowlhead's reply was that strategic funds stick to conventional corporate and govt bonds while opportunities funds also look at the stuff described in his long paragraph. And opportunities instruments are usually going to be higher risk. So there might be four baskets: low risk/strategic, eg Jupiter, M&G Optimal; high risk/strategic, eg Sanlam; low risk/opportunities, eg not sure, maybe few of these exist; high risk/opportunities, eg Schroder high yield opps.

Linton

aroominyork wrote: »

That seems at odds with bowlhead (not that he's the font of all knowledge, but then again...). My understanding of bowlhead's reply was that strategic funds stick to conventional corporate and govt bonds while opportunities funds also look at the stuff described in his long paragraph. And opportunities instruments are usually going to be higher risk. So there might be four baskets: low risk/strategic, eg Jupiter, M&G Optimal; high risk/strategic, eg Sanlam; low risk/opportunities, eg not sure, maybe few of these exist; high risk/opportunities, eg Schroder high yield opps.

Isnt that what I said, in different words?

Strategic bond funds mainly focus on diversified portfolios of lower risk bonds.

aroominyork

Linton wrote: »

Isnt that what I said, in different words?

I read your post as saying they are conventional and low risk. I am suggesting they are conventional and usually, but not necessarily, low risk. A small difference but I think a valid one.

PS Just seen that bowlhead 'thanked' you post so it would be interesting to get a view from him again.

bowlhead99

My post was to give you an idea of what some debt opportunities / credit opportunities funds might look at. That is not to say they all will. You can't really judge from the name other than the word 'opportunity' gives an implication that they will be opportunistic and therefore will not restrict themselves to plain vanilla AA+ rated sterling bonds listed on the mainstream and popular public markets with high liquidity.

Other 'strategic' bond funds will have a strategy to strategically invest in different bond types and so they probably won't be sticking to AA+ rated bonds listed in London either. They can have various strategies and you are leaving it to the manager to decide what is best to do to achieve the objectives. When you read the prospectus and other fund documentation (which you acknowledge you have received before you're allowed to place a funds order on any respectable platform) you will find out what they say their objectives are and how they approach it.

If you take Schroder high yield opportunities for example:

The fund invests at least 80% of its assets in bonds (denominated in or hedged back into sterling) issued by governments, government agencies and companies worldwide.

The fund invests at least 50% of its assets in Pan-European bonds.

The fund invests at least 80% of its assets in below investment grade securities (as measured by Standard & Poor's or any other equivalent credit rating agencies) or in unrated securities.

The fund may also invest in collective investment schemes and warrants, and hold cash.

The fund may use derivatives with the aim of achieving investment gains, reducing risk or managing the fund more efficiently.

The fund may use leverage and take short positions.

So, it's quite a complex fund with a broad remit.

The fact that 80% of the assets will be rated below investment grade or not rated at all, and may use leverage, derivatives, short postions, other funds, or share warrants as part of its portfolio means that it is going to be high risk. According to the factsheet, at the moment only <1% is lower than CCC rated but they are over a percent net short on the A rated stuff while they are 18% net long on the AA and BBB stuff that sits either side of the A. There may be other investments that are not in the chart of 'fixed income ratings' and the tables provided do not include the exposure commitment to the derivative contracts.

As a retail investor you can see the OCF for the clean share class is about 0.7% and what its historic yield and net return has been (overall return about 20% higher than M&G Optimal over last five years looking at the non-clean class whose data was easier to find), but it might be different over the next five years so there is more to life than looking at a short term chart. You have to look under the hood and a factsheet snapshot doesn't fully explain what's going on under the hood or why or what might happen when they find their next theme or 'opportunity'.


I don't see anything odd in what Linton said, we are both just generalising. As I mentioned in the first post, a concise question such as "what are credit / bond opportunties funds" cannot be met with an answer of equal length without it being an overly simplistic generalisation. Bigadaj is right that it is a marketing term. Linton and I are not going to write you a 40,000 word thesis on the bond market or a training course to cover every possibility.

If you want to DIY you have to put your head in the books or buy advice or management expertise to decide how to compare and contrast the thousands of funds out there. Or, focus on the simpler 'plain vanilla' mixed asset funds or have an IFA construct something.

Some people believe you can just buy a bond tracker and that will be fine. I believe you can do better than following the weighted average institutional pound invested, so I may use more complex types of instrument. So I might look at such a fund. If you look at your 'four types of strategic fund' system and feel it's a valid way of segregating out the myriad strategic fund models that you have seen so far, fair enough, but I'm not going to comment on the accuracy of that system or how blurred the lines might be between the categories...

coyrls

You have to decide what role bonds are playing in your portfolio. If their role is to reduce volatility, then you shouldn’t go chasing returns from bond funds, the more you do that, the more you will get correlation with equities and increased volatility, defeating your original purpose. If you are trying to maximise return from bonds regardless of risk or volatility, then it makes sense to chase returns but you need to be doing it with your eyes open.