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M&G's Tomlins unveils high yield fund with rate rise protection

M&G's Tomlins unveils high yield fund with rate rise protection

M&G Investments has launched a high yield fund designed to protect investors from interest rate rises.

The M&G Global Floating Rate High Yield (GFRHY) fund will be available to investors from next month.

The fund will be managed by James Tomlins (pictured) and Stefan Isaacs, who form part of a team which oversees £8 billion in high yield assets.

‘This fund is a fixed income solution for higher rates,’ Tomlins said. ‘The debate is not if rates will rise in the UK and US, but when and how fast.’

By stripping out duration GFRHY aims to protect capital.  

Based on the expectation of rates rising by 0.75% over the next 12 months, Tomlins underlines the material impact this could have.

‘Short duration (typically one-three years) would see a small capital loss (over the 12 months) resulting in 3.2% return, while floating rate notes (FRN) would suffer no capital loss resulting in a 4.7% total return, while taking on exactly the same level of credit risk.’

Tomlins will also use credit default swaps (CDS) and interest rate swaps to maximise the investment opportunity.

‘The floating rate note market is still maturing and not a developed asset class yet,’ Tomlins said. 'We will look to use CDS and interest rate swaps to broaden the opportunity in the fund, which we believe can double the opportunity.’

He added: ‘One of the big challenges for fixed income investors over the next few years will be liquidity and CDS are more liquid.’

However, Tomlins stressed 75-80% of the fund would be invested in physical FRNs, with the portfolio holding 60-70 individuals bonds. As the asset class gets bigger he anticipates the number of securities rising, but not significantly above 100 individual securities.

The fund will not take currency risk, with all investments hedged back to the dollar. Investors will be able to access hedged classes in sterling, euro and Swiss franc.

Tomlins has been running a model GFRHY, which has a yield to maturity of 4.26%. The spread duration stands at 1.92% and duration 0.2%.

The opened ended fund, which offers daily dealing and sits in IMA sterling high yield sector, launches on 11 September.

It will sit alongside Tomlins' European High Yield and Global High Yield funds.

Tomlins believes his team’s experience in the FRN market leaves it well placed to offer what he described a ‘unique’ proposition.

‘We cover 97% of the FRN market so this is nothing new to us. We are trying to add another interest rate risk product to a market we already understand.’   

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