Derivatives and other complexities in Man GLG Dynamic Income

aroominyork

It took me a few years to get a basic understanding of bonds – stuff about duration only really sunk in after interest rates rose in 2022 (though by luck not judgement I mostly held short duration). The only actively managed bond fund I hold is Man GLG Sterling Corporate Bond which has performed well since its launch in 2021, so it was interesting to see the same manager has a strategic bond fund, Man GLG Dynamic Income. But that second fund’s performance and holdings are very confusing so I thought it would be a good way to deepen my understanding of bonds, and I hope this thread will be helpful to others also.

The factsheet shows many versions of the fund but the one I am looking at is the hedged Man GLG Dynamic Income (Class I H) Acc, ISIN IE000RA2ZI45.

This is performance since launch. What stands out, apart from the high returns, is the almost perfectly straight line rise since last April. How is that explained?

The factsheet gives a risk indicator of 2/7 which is low for a strategic bond fund – they are typically 3/7. Yet the KIID shows 5/7, so what is going on here? Those two links both come from the same section of Man GLG’s website.

Then we drill into the holdings, where there are negative % holdings and derivatives:

-          The top 10 issues shown on the factsheetr are by sector so differ from the actual top holdings shown by Morningstar (led by 4.37% in Puffin Finance S.a.r.l. 15%)

-          Morningstar shows credit quality as 0% AAA, 0.09% AA, 1.97% A with 0% exposure to government bonds. Yet the factsheet shows 24.27% held in “North America – Government – AAA”. How does that reconcile?

-          We then get into derivatives – which I do not really understand – and the negative holdings, eg Single Name Corporates – Derivatives: 30.34% long exposure and -25.38% short exposure. Does that mean 25.38% is betting on prices of North American communications and energy bonds falling? Are derivatives just a way to lay that bet without actually owning the bond – which makes sense for a short holding – but how do derivatives work for long holdings where you are betting on price rises?

It's all quite confusing but I hope it will, with your replies, become educational.

masonic

aroominyork said:

how do derivatives work for long holdings where you are betting on price rises?

In a nutshell, exactly the same as short holdings. Instead of going out and purchasing or selling assets, you agree with some counterparty that they will provide you with a contractual return linked to the asset in question. This is how synthetic ETFs work. The counterparty is free to do what it likes to enable itself to pay that return. It doesn't have to invest in (or borrow and sell) the asset to which the return is linked. It may believe it can take the capital and invest it in other assets to deliver at least the equivalent return. It could then make a profit on the deal, but this is risky, especially for short derivatives.

Regarding the chart, it is quite smooth, which may be indicative of assets that are very low risk (compare with a money market fund for example) or just that the assets aren't valued very frequently (compare to fund investing in unlisted securities or bricks and mortar property). I don't know why the risk indicator is all over the place, but I note the fund doesn't have much historic data on which to assess volatility.

Bostonerimus1

Derivatives are just financial instruments that depend, or derive, from other financial instruments. So an option is a derivative. They can be used to hedge against a loss or to increase a gain, they can provide leverage.

aroominyork

Picking up this thread from last year, is any info published or accessible on defaults by individual bonds held in funds? 

masonic

aroominyork said:

Picking up this thread from last year, is any info published or accessible on defaults by individual bonds held in funds? 

The annual report will generally detail disposals, but I don't know if defaults would be easy to pick out from there. Info is generally also up to a year out of date. If the exposure is indirect, through a derivative, then it might not feature at all.

aroominyork

masonic said:

aroominyork said:

Picking up this thread from last year, is any info published or accessible on defaults by individual bonds held in funds? 

The annual report will generally detail disposals, but I don't know if defaults would be easy to pick out from there. Info is generally also up to a year out of date. If the exposure is indirect, through a derivative, then it might not feature at all.

Thanks. It would be useful to compare, say, HYB fund 1 with 8% average coupon and 2% defaults, to HYB fund 2 with 10% average coupon and 10% defaults. But I can understand you would need reams of data to get there. 

aroominyork

I have kept buying Jonathan Golan’s funds (Man Sterling Corporate Bond and especially Man Dynamic Income) so was interested in this article/interview. Man Group also plans to launch two ETFs with Golan managing the one which reads like a strategic bond fund rather than the high yield fund, which seems to suit his approach. I’m interested if people see things in the Trustnet piece which do not add up, or which fall too deep into “he would say that, wouldn’t he” territory.

masonic

aroominyork said:

I have kept buying Jonathan Golan’s funds (Man Sterling Corporate Bond and especially Man Dynamic Income) so was interested in this article/interview. Man Group also plans to launch two ETFs with Golan managing the one which reads like a strategic bond fund rather than the high yield fund, which seems to suit his approach. I’m interested if people see things in the Trustnet piece which do not add up, or which fall too deep into “he would say that, wouldn’t he” territory.

If the ETFs have been learned about through US SEC filings, they will probably be off-limits for UK investors unless they produce an adequate cost-disclosure document and are held on a platform that can access the relevant US market. At least he recognises how tight credit spreads are. It could become very hairy for high yield if there is a downturn, although markets have so far remained irrational, given the rather gloomy outlook, and could do for some time to come.

NedS

aroominyork said:

masonic said:

aroominyork said:

Picking up this thread from last year, is any info published or accessible on defaults by individual bonds held in funds? 

The annual report will generally detail disposals, but I don't know if defaults would be easy to pick out from there. Info is generally also up to a year out of date. If the exposure is indirect, through a derivative, then it might not feature at all.

Thanks. It would be useful to compare, say, HYB fund 1 with 8% average coupon and 2% defaults, to HYB fund 2 with 10% average coupon and 10% defaults. But I can understand you would need reams of data to get there. 

Many fund managers will sell a holding at a loss before it formally defaults rather than have the default held on their record, and will then brag about their extremely low default rate as if that makes them better at selecting junk bonds that are less likely to default. Don't read anything into default rates of a manager as they are easily manipulated.

Rather look at the macroeconomic picture and take a view on likely default rates, and make sure you are being adequately compensated for taking on that additional risk vs the risk free rate of a government gilt. The best time to buy junk bonds is often during a crisis as everyone flocks to safety and spreads widen. 

aroominyork

Is there a good source of info showing credit spreads in different geographies and for different types of bonds?

PS  I realise I can do it manually to a point, eg look at the historic income from a corporate bond index fund and compare it to a similar duration treasury over the same period, but I'd like something 'at a glance', both historic and current. 

aroominyork

masonic said:

aroominyork said:

I have kept buying Jonathan Golan’s funds (Man Sterling Corporate Bond and especially Man Dynamic Income) so was interested in this article/interview. Man Group also plans to launch two ETFs with Golan managing the one which reads like a strategic bond fund rather than the high yield fund, which seems to suit his approach. I’m interested if people see things in the Trustnet piece which do not add up, or which fall too deep into “he would say that, wouldn’t he” territory.

It could become very hairy for high yield if there is a downturn, although markets have so far remained irrational, given the rather gloomy outlook, and could do for some time to come.

Yes, it seems the markets keep taking the happy pill. But I have a(nother) question: how much difference is there in theoretical response to a recession between investment grade and junk bonds, especially considering the huge proportion of IGs in BBB and the junk just a notch or two below at BB or B? I am thinking more about how they hold up and less about widening spreads offering buying opportunities.

PS  I just read this which substantiates my question (although not necessarily your answers) www.newyorklifeinvestments.com/insights/finding-value-by-stepping-down-in-quality