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Bond liquidity fears: 14 funds which prove small can be beautiful

As M&G moves to stem inflows into its giant corporate and strategic bond funds, we highlight some of the smaller fixed income funds out there which are giving the big boys are run for their money.

M&G liquidity concerns

Last month M&G said it was taking steps to limit the size of Richard Woolnough's Strategic Corporate Bond and Corporate Bond funds.

On a conference call with investors, Woolnough said that while M&G would look to slow inflows into these two funds, the more flexible mandate of the M&G Optimal Income fund meant it would remain fully open to investors.Woolnough told investors: 'Both funds have grown rapidly and as they have become larger it has become more difficult to apply my investment process. The M&G Corporate bond will remain open but we will look to slow inflows.

The M&G Corporate Bond fund had grown to over £6.31 billion at the end of June while the M&G Stategic Corporate Bond fund had reached more than £5.16 billion.

M&G's global head of retail sales Jonathan Willcocks said that the group would be contacting its largest clients in the coming days to explore ways to slow inflows to the two funds. 'There is no simple step to slowing funds but we will contact key clients to see if we can reduce the pace of inflows,' he said.

As liquidity fears mount we take a look at just how well the big fixed income funds have fared over the last few year. We measure this against some of their top smaller competitors and highlight four more nimble corporate and strategic bond funds which feature in our Citywire Selection top funds list. We also highlight the top five holdings in all the funds, while offering an insight into their investment thinking as the eurozone debt crisis hits melting point

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The Giants

M&G Strategic Bond fund: Richard Woolnough

Fund size: £5.2 billion (end of June)

Top five holdings (excluding gilts):

- Wal-mart
- Granite
- Lloyds Banking
- BAA
- Tesco

Manager's quote: 'The huge boom created by the Fed has come to an end and the US economy has worked its way through the crisis and the inventory but Europe is not so far through. In Europe the average divergence between countries in terms of unemployment is huge and the tools to get convergence are not working. The monetary policy of the eurozone means the strong get stronger while the weak get get weaker because the weakest have the tightest fiscal deficit.

'Countries like Spain don't have an option to devalue the currency like the Swiss or the UK so the problem gets worse. Unlike in the US, we have yet to reach the crunch point where the problem wgets resolved,. That means full union or currencies reintroduced. We are going to see lots and lots more QE and the lack of supply of gilts will drive them down so 10 year gilts will remain at record lows. The BoE is pursuing a low rates policy and further QE so an unconventional bond market is what we have and that is the world we live in.'

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M&G Corporate Bond: Richard Woolnough

Fund size: £6.3 billion (June)

Top five holdings: (excluding gilts)

- Lloyds Banking
- Granite Master Issuer
- Wal-Mart
- EDF Energy
- BAA

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M&G Optimal Income: Richard Woolnough

Size: £8 billion (June)

Top five holdings:

  • - Granite Master Issuer
  • - Lloyds Banking
  • - BAA
  • - Imperial Tobacco
  • - EDF Energy
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    Invesco Perpetual Corporate Bond fund: Paul Causer and Paul Read

    Size: (end of June) £5.5 billion (June)

    Top five holdings:

  • - Lloyds Banking Group
  • - Barclays Bank
  • - RBS
  • - GE
  • - Abbey
  • Managers' quote: ‘Sterling corporate bonds had positive returns in June and outperformed gilts amidst rising risk appetite. Market reacted positive to the election of a Greek government committed to implementing the austerity measures agreed with the EU and IMF and to the agreement reached at the EU summit to allow the broader use of EU rescue funds to support eurozone banks and sovereign bond markets.’

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    Invesco Perpetual Monthly Income Plus fund: Causer, Read and Neil Woodford

    Fund size: £3.3 billion (June)

    Top five holdings:

    - Lloyds Banking Group
    - RBS
    - UPC
    - Barclays Bank
    - UBS

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    Fidelity Moneybuilder Income: Ian Spreadbury

    Fund size: £3 billion (June)

    Top five holdings:

    - UK Treasury War Loans 3.5% Perpetual 2.2%
    - UK Gilt 4.25% 07/12/2055 2.0%
    - UK Gilt 4.5% 07/03/2013 1.8%
    - UK Gilt 4.25% 07/03/2036 1.7%
    - UK Gilt 2.25% 07/03/2014 1.4%

    Manager's quote: While Spreadbury is wary of some risk in government bonds he is also wary of the liquidity problems in the market. Explaining why his top holdings are in ‘defensive’ gilts he said: 'I want to be quite liquid in this environment and it is also a reflection of the risks to growth which I think have increased in recent months.’

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    Best of the rest: Corporate Bonds

    Old Mutual Corporate Bond: Christine Johnson

    Fund size: £462 million (June)

    Portfolio breakdown – top five holdings:

    - UK 4.5000% Gilt 07/12/204
    - HSBC 6.375% 18/10/2022
    - Time Warner Cable 5.75% 02/06/2031
    - Comcast Corp 5.5% 23/11/2029
    - Highbury Finance 7.01% 20/03/2023

    Manager's quote: ‘From here we believe very strongly in the fundamental value in credit. Corporates are in fine shape and as inflation falls the real value of coupons increases. We believe the economic backdrop will remain weak but not disastrous as central banks struggle valiantly to stave off recession.’

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    Henderson Sterling Bond: Stephen Thariyan and Philip Payne

    Fund size: £482 million (June)

    Top five holdings:

    - UK Treasury 4.5% 2034
    - Wal-Mart stores 4.875% 2039
    - Nationwide Building Society 5.625% 2026
    - EDF 5.5% 2041
    - AT&T 5.875% 2017

    Managers' quote: The latest European Union summit appears to have bought EU leaders more time once again, but still leaves the real issues unresolved. The expectation of further stimulus by global central banks in July is also likely to support markets in the short term, but recent data continues to point towards a slowing in global growth, which is likely to provide a further headwind later this year.’

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    Ignis Corporate Bond fund: Chris Bowie & Adam Walker

    Fund size: £262.2 million (June)

    Portfolio breakdown:

    - Non-financials 45.7%
    - Financials 29.7%
    - Asset backed securities 17.8%
    - Cash 4.7%
    - Gilts 2.1%

    Managers' quote: ‘Although the fund has added some risk this month we still remain cautious. Valuations are attractive but there remains significant risk in terms of the state of the global economy. Data from the US continues to deteriorate and despite positive headlines following the euro group meeting, details remain light and execution risk high.’

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    Kames Sterling Corporate Bond: David Roberts and Ian Buckle

    Fund size: £418 million (June)

    Top five holdings:

    - UK(Govt of) 4.25%, gilt 07/12/2040
    - Kreditanstfur Wie 3.125% 14/12/2026
    - ABP Finance PLC 6.25% 14/12/2026
    - Gen Elec Cap Corp 6.5%-FR 09/67
    - HBSC Bank 4.75% 09/20

    Managers' quote: ‘Markets were dominated by events in the eurozone, with particular concern over the Spanish banking system.

    With this backdrop, credit positioning had a mixed impact on performance. Having no exposure to southern European financial institutions was a positive driver, though the small holding in Telefonica bonds hampered performance as the market punished all things Spanish, not just banks.

    ‘The fate of the eurozone will remain the key driver of markets. We are in a position to add credit risk through sensibly-priced new issuance when suitable, but will be vigilant about rotating out of exposures that we feel have run their course.’

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    BlackRock Corporate Bond fund: Simon Blundell and Ben Edwards

    Fund size: £154 million (June)

    Top five holdings:

    - UK Conv Gilt 3.75 09/07/2021
    - John Deere Capital Corp 2.8 01/27/2023
    - Banco Santander 4.125 01/09/2017
    - Time Warner Cable Inc 5.25 07/15/2042
    - Barclays Bank MTN 6.75 01/16/2023

    Managers' quote: ‘While the market seemed initially pleased with the policy promises from the EU Summit, further details of implementation are still not forthcoming, significant political hurdles remain and the proposed timeline is becoming more unrealistic as time passes. We expect risk assets will continue to require European policy action to recover to previous levels.

    ‘The fund remains cautiously positioned given the uncertainty and continued political risk emanating from Europe. We reduced our exposure to French corporate risk which we believe does not compensate for possible acceleration of the European crisis. Currently, the risk budget is weighted more heavily to single name opportunities rather than taking more significant credit market positions across the fund.’

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    Best of the rest: Strategic Bond funds

    AXA Framlington Managed Income: George Luckraft

    Fund size: £52.4 million (June)

    Top five holdings:

    - Iron Mountain inc 7.25% 15/04/2014
    - Premier Farnell 3.3%
    - Scottish Mutual Assurance PLC 7.25% PERP
    - Beazley Group PLC 7.25% 17/10/2026
    - Cable + Wire Intl 8.625% GTD BDS 25Mar2019 GBP

    Manager's quote: ‘The current scandals in the banking sector could damage various institutions if more damaging information emerges. The ratification by national countries of the decisions taken at the recent EU summit could produce some nasty surprises. This uncertainty is reflected in the available yields on financial bonds.’

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    UBS Long Dated Corporate Bond UK Plus fund: team managed

    Fund size: £87.1 million (June)

    Top five positions:

    - UK government 6.1%
    - Cash and derivative offsets 4.6%
    - Insurance 2.6%
    - Banks 2.3%
    - Securitised 2.1%

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    Jupiter Strategic Bond fund: Ariel Bezalel

    Fund size: £1 billion (June)

    Top five holdings:

    - Australian government 4.75% 21/04/27
    - Australian government 5.5% 21/04/23
    - Australian government 5.75% 15/07/22
    - Eksportfinans 5.5% 26/06/17
    - Golden Close Maritime 11% 09/12/15

    Manager's quote: ‘Although the current environment has led to traditional ‘safe haven’ assets such as UK government bonds and German bunds trading on very low yields, we believe that there are still plenty of attractive fixed interest investment opportunities available. We believe default rates, especially in Europe, to tick higher, therefore it is crucial to be highly selective.’

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    Baillie Gifford Corporate Bond fund: Stephen Rodger and Torcail Stewart

    Fund size: £180.7 million (June)

    Top five holdings:

    - IBRD 5.4% 2021
    - Telereal B-4 6.1645% 2031
    - Central Euro Media 11.625% 2016
    - Tesco Property Finance 7.6227% 2039
    - Goodman Group 9.75% 16/07/2018

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    Artemis High Income: Adrian Frost and Adrian Gosden

    Fund size: £543 million (June)

    Top five holdings:

    - First Hydro Finance 9% GTD SEC BDS 31/07/21 GBP
    - F&C Finance
    - Finial Holdings
    - Tullet Prebon 7.04% 2016
    - BT Ord GBP 0.05

    Managers' quote: ‘The portfolio rose modestly over the month, helped by the better performance from the equity weighting. Our main transaction was the sale of the holding in United Utilities, which had performed very well and now sits on a more modest yield. We re-stocked some BT into the price weakness.’

    The following funds four corporate and strategic bond funds feature in Citywire Selection, our guide to what we perceive to be the best investment funds.

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    The selection picks

    Henderson Strategic Bond: John Pattullo and Jenna Barnard

    Fund Size: £1 billion (June)

    Top five holdings:

    - US Treasury 0.125% 2013
    - UK Treasury 4.5% 2042
    - Bupa Finance 6.125 Perp
    - Legal & General 6.385% Perp
    - Daily Mail 5.75% 2018

    Managers' quote: ‘Activity was fairly limited on the fund. We did purchase some BG Energy, British American Tobacco, Time Warner Cable, and Kabel Deutschland bonds. Derivatives were used, but to a much lesser extent than the month before. Two of our largest holdings saw some very positive action: Alliance Boots received a partial takeover from the huge and secure US pharmacy chain Walgreens. Our ITV bonds received a very generous tender offer, which we partially agreed to.

    ‘In addition, we added some long-dated 2042 gilts to raise the interest rate sensitivity of the fund. Given the fading global growth outlook we continue to be very selective about credits we introduce and maintain in the portfolio. We favour large non-cyclical industrial credits in the double and triple B category.’

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    Old Mutual Global Strategic Bond: Stewart Cowley

    Fund size: £700 million (June)

    Top five holdings:

    - UK 4.5000% Gilt 07/12/2042
    - US Treasury N/B 3 15/05/2042
    - US TREAS. 3.625% 98-2028 INFL. 15/04/2028
    - UKTI 1 7/8 22/11/2022
    - US Treasury Bill 26/07/2012

    Manager's quote: ‘Major hurdles face the global economy. Elections and politics in Europe (and the US) add undesired flux to markets. Eurozone sentiment has clearly deteriorated. Austerity fatigue is driving politicians to ‘Plan B’ – capital markets will ultimately determine the growth versus profligacy debate.’

    ‘The US remains a serial offender in over-spending, but is the least bad option with the additional benefit of controlling the world’s reserve currency. For now, away from our longer-term structural views, we stay long rates in US, UK, hold zero euro and allocate to US dollar.’

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    Investec Global Bond: John Stopford and Russell Silberston

    Fund size: £110 million

    Top five holdings:

    -US Treasury 2.125 Aug 15 21
    - US Treasury 2.625 Dec 31 14
    - Norway (Govt Of) 3.75 May 25 21
    - Canada (Govt Of) 2.0 Sep 01 12
    - Germany (Fed Rep) 6.25 Jan 04 24

    Managers' quote: Speaking to Bloomberg TV on 23 July when the yield on Spanish debt shot up to 7.5%, Stopford said: 'The problem in the region is profound, but the pace that it has been dealt with was slow. The bank bailout for Spain was far from sufficient to deal with the country's problems.'

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    L&G Dynamic Bond Trust: Richard Hodges

    Fund size: £1.5 billion (June)

    Top five holdings:

    - Lloyds banking group
    - Royal Bank of Scotland
    - ING Groep
    - Barclays Bank
    - BAA

    Manager's quote: ‘We are targeting specific bonds where we believe we will have another round of liability exercises. [These are] predominantly in Dutch banks which are lower tier-two bonds where they have yet to do liability management exercises [but] which we believe are imminent.’

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    Related Fund Managers

    Stephen Rodger
    Stephen Rodger
    10/46 in Bonds - Sterling Strategic Bond (Performance over 3 years) Average Total Return: 38.04%
    Torcail Stewart
    Torcail Stewart
    11/46 in Bonds - Sterling Strategic Bond (Performance over 3 years) Average Total Return: 38.04%
    Ariel Bezalel
    Ariel Bezalel
    18/46 in Bonds - Sterling Strategic Bond (Performance over 3 years) Average Total Return: 34.52%
    Paul Causer
    Paul Causer
    7/46 in Bonds - Sterling Strategic Bond (Performance over 3 years) Average Total Return: 44.97%
    Paul Read
    Paul Read
    8/46 in Bonds - Sterling Strategic Bond (Performance over 3 years) Average Total Return: 44.97%
    Ian Spreadbury
    Ian Spreadbury
    20/132 in Mixed Assets - Balanced (Performance over 3 years) Average Total Return: 36.08%
    John Stopford
    John Stopford
    29/46 in Bonds - Global High Yield (Performance over 3 years) Average Total Return: 33.60%
    Russell Silberston
    Russell Silberston
    57/65 in Bonds - Global (Performance over 3 years) Average Total Return: -5.50%
    Stewart Cowley
    Stewart Cowley
    45/65 in Bonds - Global (Performance over 3 years) Average Total Return: -0.65%
    John Pattullo
    John Pattullo
    6/7 in Bonds - Sterling High Yield (Performance over 3 years) Average Total Return: 35.01%
    Jenna Barnard
    Jenna Barnard
    7/7 in Bonds - Sterling High Yield (Performance over 3 years) Average Total Return: 35.01%
    Simon Blundell
    Simon Blundell
    21/59 in Bonds - Sterling Corporate Bond (Performance over 3 years) Average Total Return: 31.10%
    Ben Edwards
    Ben Edwards
    39/76 in Bonds - Sterling Corporate Bond (Performance over 1 year) Average Total Return: 7.30%
    David Roberts
    David Roberts
    13/59 in Bonds - Sterling Corporate Bond (Performance over 3 years) Average Total Return: 33.31%
    Stephen Thariyan
    Stephen Thariyan
    49/59 in Bonds - Sterling Corporate Bond (Performance over 3 years) Average Total Return: 25.21%
    Philip Payne
    Philip Payne
    48/59 in Bonds - Sterling Corporate Bond (Performance over 3 years) Average Total Return: 25.28%
    Christine Johnson
    Christine Johnson
    17/59 in Bonds - Sterling Corporate Bond (Performance over 3 years) Average Total Return: 32.82%
    Richard Woolnough
    Richard Woolnough
    47/59 in Bonds - Sterling Corporate Bond (Performance over 3 years) Average Total Return: 25.41%
    Adrian Frost
    Adrian Frost
    37/76 in Equity - UK Equity Income (Performance over 3 years) Average Total Return: 57.51%
    Adrian Gosden
    Adrian Gosden
    36/76 in Equity - UK Equity Income (Performance over 3 years) Average Total Return: 57.51%
    George Luckraft
    George Luckraft
    41/76 in Equity - UK Equity Income (Performance over 3 years) Average Total Return: 55.36%
    Neil Woodford
    Neil Woodford
    35/76 in Equity - UK Equity Income (Performance over 3 years) Average Total Return: 57.56%
    Richard Hodges
    Richard Hodges
    Chris Bowie
    Chris Bowie
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