Star managers: equities vs. bonds

masonic

aroominyork said:

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.

I don't know about the historical composition of the corporates market, but several governments had their credit rating downgraded post-GFC. Returns will usually be higher at the lower end of the credit rating scale as there is a risk premium. The trick is not to be caught in the falls when spreads widen (rising interest rates again) or defaults pick up. If you can do that, then that will translate into outperformance, generally of the macro variety. But in general, long term returns from higher risk bonds should be higher than those from lower risk bonds.

OldScientist

aroominyork said:

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.

Experience is a great teacher! The last time rates went up this quickly was back in the 60s and 70s, and there were few (if any?) bond funds (or, AFAIK, investment trusts) so probably no lessons to be learned (in the 80s, my father held a few individual bonds for the coupons as part of a natural yield portfolio).

While I do play with duration a little, a sizeable fraction of our fixed income is in fixed rate savings accounts because that is where, my very risk averse, OH prefers to keep it. So luck for us too.