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Does Dickie Hodges L&G exit have implications for strat bond funds?

Does Dickie Hodges L&G exit have implications for strat bond funds?

Dickie Hodges (pictured) is the latest high profile fund manager to shock the industry with his plans to exit Legal & General IM after seven years.

As lead manager of the £2 billion Legal & General Dynamic Bond trust, he was known for his conviction-led approach and expertise on both long and short side. Hodges will remain at the firm until October, to complete the transition to L&G senior bond manager Martin Reeves.

Investment managers and fund researchers who back Hodges’ fund now face the quandary of whether to hold steady with the position or use his exit as an opportunity to reassess their strategic bond positioning. 

In a sector dominated by a number of behemoth funds, some could be forgiven for fearing that potential redemptions from the Legal & General Dynamic Bond trust could flow into the incumbents. Alternatively, investment managers may choose to reallocate to a smaller, up and coming fund.

Rob Harley, senior research analyst at Bestinvest, said Hodges’ departure could represent an opportunity to consider a shift out of fixed income altogether, given how far spreads have come in.

‘You have to take a step back and look at the whole fixed income universe, and ask what is there to play for?’ he said.

‘The dispersion of returns is going to narrow materially and the ability of these managers to add alpha is diminishing. It’s difficult to see where the next big trade is coming from. We had the financial and the peripheral trades last year, but they have been squeezed out of the market.’

If investors want to remain in the strategic bond sector, Harley favours M&G’s Richard Woolnough, who is Citywire A-rated and runs the £20 billion Optimal Income fund. At the end of March he had 6.1% of the fund in equities.

‘He can’t do as much as he did given the fund’s size, but he is the ultimate strategist and still worth investing with,’ Harley said.

‘He gets it right more than anyone else. He uses equities, but so what? It’s a good option to include equities because they are more liquid and it gives him additional flexibility.’

Ben Gutteridge, head of fund research at Brewin Dolphin, also views Hodge’s departure as a good opportunity for investment managers to think about what they want to do with their fixed income exposure.

In his view, the time could be ripe for investors to look at areas of the bond market offering better value.

‘People who have strategic bond exposure should switch a decent proportion of that. Generally, we would see high yield as a reasonable replacement at this stage in the cycle,’ he said, singling out Barings and Threadneedle as good names in the space.

Mick Gilligan, head of research at Killik said his team had already switched some of his firm’s holding in L&G Dynamic Bond to the Monument Bond fund before Hodges’ departure. He was attracted to the Monument fund due to its ability to effectively manage risks from a rise in interest rates through asset-backed securities.

He expects protecting against interest rate risk will be key in investors’ minds if they are looking at where to move their money.

‘I would be surprised if the beneficiaries were traditional corporate bond funds because they are not in the interest rate hedging game as much,’ Gilligan said.

‘The likes of M&G and Invesco hedge interest rate risk, but while they might take their duration from seven to five, they are unlikely to go negative duration.’

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Richard Hodges
Richard Hodges
21/40 in Bonds - Global Flexible (Performance over 3 years) Average Total Return: 6.50%
Richard Woolnough
Richard Woolnough
17/50 in Bonds - Sterling Strategic Bond (Performance over 3 years) Average Total Return: 12.04%
Martin Reeves
Martin Reeves
12/57 in Bonds - Global High Yield (Performance over 3 years) Average Total Return: 15.81%
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