Although his four largest holdings are UK gilts and US Treasuries, reflecting his caution, Citywire AA-rated Craig Veysey is finding opportunities in corporate positions he believes the market is overlooking.
‘There is particular interest in credit fallen angels that have been downgraded from investment grade to sub-investment grade, but still with the potential for credit improvement,’ he said.
The £150 million Sanlam Strategic Bond fund is currently holding around 70% in corporate bonds. Veysey uses a credit-adjusted and value scoring methodology for screening, which concentrates on seeking out attractively valued paper.
‘We do a lot of research on individual issues and have a database of bonds that we know well,’ he said.
Low pricing and ongoing income are some of the factors that determine what the fund ultimately invests in.'
One name Veysey (pictured) says is representative of the strategy is his holding in Canary Wharf bonds. He took a position in them back in 2014 after the group’s involvement in a court dispute caused the price to slip from £1.30 to £1.15. Two years later the case was decided in favour of the bondholders, who were repaid at £1.80, giving the fund a decent return.
Telecom Italia is another example of what piques his interest. Veysey took a position in the telecommunications company after the US election in 2016. The price had fallen due to uncertainty surrounding the Italian political environment, while the US yield had increased
‘It was an attractive situation to buy dollar-denominated debt at a good price,’ Veysey said.
Similarly, the fund has held a position in Co-op for the past two years, having taken advantage of the fact that investors regarded it as the next UK bank to go under.
‘We own the Co-op bonds that are removed from the bank’s situation. So now we have a group that is mainly focused on retail, such supermarkets and funerals.’
It is currently among the fund’s largest holdings at around 2.3% of assets.
Some of the other names appearing in his top 10 list include Lloyds (3%), Standard Life (2.5%) and Standard Life Aberdeen (2.5%), which are indicative of Veysey’s current preference for financials. He views government debt as an opportunistic way of adding value.
The fund, which has historically produced a yield of 5.5% to 6% annually, employs an active macro overlay strategy using government bonds in order to manage duration sensitivity and diversify in the portfolio.
Governemtn bond duration is currently kept short, with Veysey preferring short maturities to which duration can be added as opportunity arises.
A very recent position has been a 5% exposure to UK gilts. ‘We [did this] a couple of weeks ago, as we believe they can benefit from an anticipated dovish Bank of England message to accompany Friday’s rate hike, before taking profit in advance of meeting risk,’ Veysey said.
‘We do not think the Monetary Policy Committee will be in a rush [to perform an additional rate hike]. The authorities will likely want to see the impact on consumers and households with variable rate mortgages.’
The fund increased US duration slightly, as yields also rose in late October, based on the view that Janet Yellen was dovish while the incoming new chair of the Federal Reserve, Jerome Powell, is less dovish.
With some 95 positions in its portfolio, over the three years to October the fund returned 30.5% against a sector average of 13.4%.