Bond fund price movements

aroominyork

Hopefully on the basis that there is no such thing as a stupid question… what affects the price of bond funds? Obviously yield, defaults and duration/interest rate sensitivity, but if a fund significantly outperforms its sector what else is happening? Has the manager identified bonds with good yields where the risk of default is lower than the market has priced in and, as the bond approaches maturity, its price increases to reflect the market recognising that low risk of default?

Linton

The HSBC fund is an index fund whereas the Man GLG is active.  Hence, they have quote different allocations.

See some of the key factors relating to the underlying assets.....

                            Man GLG vs HSBC

Coupon  >6 %:  62%/12%
Maturity <5 years: 81%/44%
Credit quality >BBB: 31%/64%


The Man GLG fund focuses on shorter duration, higher risk and return bonds. Following the rise in interest rates the  low coupons of the HSBC fund are unattractive as you can get similar interest from safe goverment bonds whereas the Man fund coupons are significantly higher and so more desirable.  Also the Man fund benefits from its short duration investments as it is able to quickly restock on new even higher coupon bonds.

Hoenir

Over the time frame you've choosen the BOE sold off the £10 billion odd of corporate debt that it was holding on the banks balance sheet as part of the QE era exercise. Free markets are again determining the price of individial instruments. 

aroominyork

Nice analysis, Linton. So part of this is macro choices, the short duration, and the rest seems to be good bond selection - would you agree? Other actively managed funds look like index huggers given the small difference between the index fund and the sector.

aroominyork

I’m re-posting my question in case anyone want to answer. When you allow for yield/credit quality, defaults and duration/interest rate sensitivity, and a bond fund still significantly outperforms, must that come down to bond selection or could other factors be at play? (This fund has done well for me over the last year and I’m trying to understand whether I am cruisin’ for a bruisin’ or potentially backing a very good fund manager.)

InvesterJones

What are you suggesting could be at play other than bond selection (which accounts for all the other factors you mention)?

aroominyork

InvesterJones said:

What are you suggesting could be at play other than bond selection (which accounts for all the other factors you mention)?

Absolutely no idea - it's a genuine question. If it is bond selection - and since his strategic bond fund is equally streets ahead of the competition - he seems to be (dare I say it...) a star manager.

InvesterJones

aroominyork said:

InvesterJones said:

What are you suggesting could be at play other than bond selection (which accounts for all the other factors you mention)?

Absolutely no idea - it's a genuine question. If it is bond selection - and since his strategic bond fund is equally streets ahead of the competition - he seems to be (dare I say it...) a star manager.

What out-performance are you seeing after accounting for the high proportion of non-investment grade bonds? I mean, if you want to go down that route then are you considering other high yield funds (like say, Schroder High Yield Opportunities Fund Z Accumulation GBP GB00B5143284 )?

aroominyork

It's not a high yield fund, it's an IG fund: 82% investment grade (mostly BBB, but that's not unusual for IG funds), 6% junk, 11% unrated. The outperformance, from Trustnet, is that over the last year is has returned 22.2% while the next best corproate bond fund returned 9.3% (Schroder topped the high yields at 15.2%). In six months it will have been around long enough for a three year comparison.

But please remember I am not asking whether this run will continue; I am only asking about factors that influence bond fund prices.

InvesterJones

aroominyork said:

It's not a high yield fund, it's an IG fund: 82% investment grade (mostly BBB, but that's not unusual for IG funds)

Ah OK, I thought it was only 31% investment grade, but realise I misread the previous post and included an extraneous = with the > sign!

aroominyork

Yup, Linton's >BBB could easily have been read as 31% invetment grade. The IG breakdown is 28.5% AA (a healthy chunk of UK gilts), 2.5% A, 51.3% BBB.