Star managers: equities vs. bonds

aroominyork

This forum sometimes indulges in financial schadenfreude about equity managers whose stars wane. The theme tends to be that equity styles come and go so if, for example, your Baillie Gifford funds shoot out the lights for a few years you shouldn’t be surprised if you later take a hammering.

How does this apply to bond funds? About 15 months I bought Man GLG Sterling Corporate Bond and it has done very well. The manager Jonathan Golan’s other funds are also all top of their sectors (you can link to the three funds here) and he had a good record at Schroders before joining Man GLG in 2021. Are bond managers less style-driven and so more able, potentially, to adapt to changing market conditions and maintain strong performance throughout the cycle?

PS. Just realised you have to log in to Citywire. The two other funds are Man GLG Dynamic Income and Man GLG Global Investment Grade Opportunities.

Beddie

I also have money in 2 of these funds. Very stable and steady performance so far. Of course he may well have a dip too, by making the wrong calls, after all he holds a lot of lower grade bonds and there is potentially more risk with them.

I personally feel that active bond funds are worth choosing over trackers, even if the latter are fine for equities, but of course it's up to the individual. Time will tell if this manager continues his excellent track record.

aroominyork

Dynamic Income is generally shorter duration with lots of sub-investment grade bonds. I cannot see much difference between the other two in quality or duration, although Sterlingt Corporate Bond has an objective of outperforming its benchmark over three year rolling periods, while Global Opps has medium to long term objectives.

OldScientist

There are broadly two or three things that the managers of active bond funds can do

1) They can adjust duration according to their reading of future market conditions.
2) They can adjust quality according to their reading of future market conditions.
3) For global funds, they can adjust the balance of their holdings between different countries

If they predict the future well, the funds will do well and hopefully overcome the larger fees.
If they predict the future poorly, they won't.

According to SPIVA (https://www.spglobal.com/spdji/en/spiva/article/spiva-europe and pdf linked on that page if you want more details) out of European fixed income, it was only GBP corporate bond funds where active managers had the edge (23%-45% underperformance up to 5 years, but 67% underperformance over ten years).

aroominyork

Interesting, but why do you only mention macro issues? Yes, these funds have clear macro slants - favouring UK and Europe and avoiding the US, and focuing on banks, financials and real estate. But the manager would also say he looks in detail at individual bonds and the level of ourperformance cannot be explained purely at macro level.

But let's look at the macro issues you raised, in the context of my OP. Do bond managers tend to be more nimble than equity managers in changing macro approach?

masonic

aroominyork said:

But the manager would also say he looks in detail at individual bonds and the level of ourperformance cannot be explained purely at macro level.

Yes, that sounds rather like something a manager would say. The question is what impact individual bond selection could have on performance. A bond either pays all of its coupons and returns the principal in full when it matures, or it defaults and returns somewhat less than this. It doesn't matter if the issuer of the bond is hugely profitable or has an astronomical rise in share price. Additional returns are not paid out to bondholders for good company performance. So any gain must be made by either avoiding or taking on additional credit risk, whether reflected in the ratings or not. That could include pouncing on the debt of companies in a spot of financial bother, but which the manager believes will come good, or meticulously avoiding the debt of companies that are in more trouble than the market or rating agencies believe. That seems rather similar to what equity fund managers would be trying to achieve. I think the argument that macro-level calls could be easier to get right for bonds vs equities is plausible, but I don't think individual selection decisions are likely to be any easier to get right.

aroominyork

Intersting, masonic. So how can you assess whether a fund's outperformance is based on macro or company selection? Let's compare Man GLG Sterling Corporate Bond to the index, pulling data from Morningstar.

Modified duration. Man 5.97, Index 5.33.

Credit rating. Man BBB. Index A-.

Weighted coupon. Man 7.86%. Index 5.08%

Since launch in September 2021 Man has risen 24%, the sector has fallen 10%. Man is avoiding the US and is overweight in financials. But without pulling the data apart is this - or any other readily available data - telling us the reasons for its performance?

masonic

aroominyork said:

Intersting, masonic. So how can you assess whether a fund's outperformance is based on macro or company selection? Let's compare Man GLG Sterling Corporate Bond to the index, pulling data from Morningstar.

Modified duration. Man 5.97, Index 5.33.

Credit rating. Man BBB. Index A-.

Weighted coupon. Man 7.86%. Index 5.08%

Since launch in September 2021 Man has risen 24%, the sector has fallen 10%. Man is avoiding the US and is overweight in financials. But without pulling the data apart is this - or any other readily available data - telling us the reasons for its performance?

I think you would need to go over the annual reports over several years and analyse the transactions. Even then it would be difficult as you'd need to deduce whether a particular acquisition or sale was made on the basis of macro or individual company factors. You would probably need the direct input of the fund management team to be confident in your analysis. I suppose if you did a sector by sector analysis (geography and industry sector), then if the companies selected by the fund to represent each sector tended to outperform their peers in the same sector over the time period their bonds were held, that would be evidence for a bottom-up approach driving outperformance.

Given the stark difference in performance between the fund and its supposed sector average, I'd question whether the other funds in the sector are really equivalent in terms of asset allocation. Clearly there was lots of downside due to interest rate sensitivity during that period, so longer duration funds would have suffered a lot while shorter duration funds would have been much less affected. You can see from the breakdown that it is doing strange things at long duration (has it been shorting long duration debt?) and is taking more credit risk than its benchmark. Both tilts would have been very positive for returns over the past couple of years.

aroominyork

Is it historically typical for there to be so much BBB credit in the market, or is linked to the ultra-low interest rates of recent-yesteryear? It looks like this manager thinks the value and returns are at the risky end of the credit scale; his Dynamic Income fund is sub-investment grade (at shorter duration) - it makes me wonder whether he would invest the Sterling Corporate Bond fund similarly if he were not restricted by the fund's mandate of being 80% IG.

OldScientist

aroominyork said:

Intersting, masonic. So how can you assess whether a fund's outperformance is based on macro or company selection? Let's compare Man GLG Sterling Corporate Bond to the index, pulling data from Morningstar.

Modified duration. Man 5.97, Index 5.33.

Credit rating. Man BBB. Index A-.

Weighted coupon. Man 7.86%. Index 5.08%

Since launch in September 2021 Man has risen 24%, the sector has fallen 10%. Man is avoiding the US and is overweight in financials. But without pulling the data apart is this - or any other readily available data - telling us the reasons for its performance?

Thanks for the link. One aspect that I hadn't considered was the use of derivatives (according to your link, a 32% allocation in January 2024), shorts (18% allocation to bonds, and 56% to cash) or other non-bonds (e.g., I note that the top two holdings were both US treasury futures both listed as 'government' holdings). My understanding of these instruments is insufficient to know whether these explain the good performance or not.

Duration is one area where bond managers could have done very well over the last few years. I don't have figures for the corporate bond sector, but it is worth noting that the 'all stocks' gilt index had a modified duration of about 13 in the run up to the increase in yields and, consequently, experienced large falls in NAV. As expected, shorter duration gilt funds (e.g., 0 to 5 years) saw much lower losses.

aroominyork

OldScientist said:

aroominyork said:

Intersting, masonic. So how can you assess whether a fund's outperformance is based on macro or company selection? Let's compare Man GLG Sterling Corporate Bond to the index, pulling data from Morningstar.

Modified duration. Man 5.97, Index 5.33.

Credit rating. Man BBB. Index A-.

Weighted coupon. Man 7.86%. Index 5.08%

Since launch in September 2021 Man has risen 24%, the sector has fallen 10%. Man is avoiding the US and is overweight in financials. But without pulling the data apart is this - or any other readily available data - telling us the reasons for its performance?

Duration is one area where bond managers could have done very well over the last few years. I don't have figures for the corporate bond sector, but it is worth noting that the 'all stocks' gilt index had a modified duration of about 13 in the run up to the increase in yields and, consequently, experienced large falls in NAV. As expected, shorter duration gilt funds (e.g., 0 to 5 years) saw much lower losses.

In the couple of years before rates rose, much of my fixed interest was in a short duration corporate bond fund. This was luck. It was not because of concerns about interest rate sensitivity; it was just a well performing fund in which I had confidence. The subsequent rise in rates reinforced that as much as you read, it can be hard to truly understand some issues until you have experienced them. When rates were still on the floor, as much as a few knowledgable people on this forum would talk about rate sensitivity and return-free risk, most of it went over my head until rates rose, bond prices nose-dived, and I could see what was going on.