The co-managers of the GLG Strategic Bond fund have dramatically shifted their position on both emerging market debt and the US in favour of financial plays in Europe and the UK.
Jon Mawby, who co-manages the portfolio with Andy Li, said: “We had a 10 per cent allocation to emerging market debt but feel there are better opportunities in developed markets, perhaps more in rate terms as opposed to credit, given the headwinds developing economies will face on the back of the tapering of quantitative easing in the US.”
However, in spite of the shift, emerging markets still remain part of the duo’s strategy, albeit via short bets, most notably in terms of Russia and South Africa.
The primary motivation for a shift away from the US into Europe’s financial sector has been due to the team’s conviction that the region currently offers improving fundamentals and, most importantly, better value.
“We have a very value-driven investment approach,” Mr Mawby said.
“We have structured the fund towards European credit, particularly in financials, where depending on the issuers, we can get 6 per cent to 8 per cent. The low growth and deflationary environment represent ideal conditions for credit in the short term.”
In contrast, one of the management team’s main reasons for rotating further into the UK has been because of the improved economic backdrop, where again the managers favour financials, chiefly in insurance, because of its favourable “risk-return profile”, especially in regards to industry stalwarts Bupa and Scottish Widows.
Given that bond market volatility has been borne out of interest-rate risk, the managers have been running the portfolio as a “low-duration credit fund” but when the tide changes and rates rise they will be more comfortable with the interest-rate sensitive side – and less so with credit.
The co-managers anticipate rates in the UK will tighten either now or late next year.
“It would be a very brave central banker to tighten in the immediate months before a general election,” adds Mr Mawby.
As for the US, they believe a rate hike is more likely to occur after the UK’s rise.
“The unemployment rate needs to trend down and inflation needs to be above 1.5 per cent, heading towards 2 per cent but, most importantly, wage growth has to come through,” Mr Mawby said.
Notably the ‘go-anywhere’ mandates of strategic bond funds in general have been hugely popular among investors given the uncertainty and interest-rate risk engulfing fixed interest markets.
The GLG vehicle, which marks its third anniversary in November, has enjoyed a remarkable surge in assets under management where year to date it has swelled by some 450 per cent – from circa £155m in January to £855m today.
Since its inception the fund has delivered a total return of 33 per cent, comfortably ahead of the IMA’s Sterling Strategic Bond sector mean of 22 per cent for the period, according to data from FE Analytics.
