Deutsche Asset Management's corporate bond fund manager Charles McKenzie has positioned his portfolio ready a global economic recovery, writes Laurence Fletcher.
McKenzie, who has run the £42.5 million (Deutsche Corp Bd Plus A Acc) unit trust since its launch last August, benefited from the fund’s relatively high exposure to defensives towards the end of last year.
Since the start of this year, he has shifted the portfolio’s focus to cyclicals, and although this strategy has so far failed to bear fruit, he retains faith in a global economic pick-up.
He told Citywire: ‘I’ve been more aggressive since the start of the year, and I’m looking for a global economic recovery. We’re overweight in cyclical corporates, and have reduced exposure to utilities and financials, which have unfortunately performed very well [since he reduced his exposure].’
McKenzie’s strategy is to search for undervalued bonds in the ‘inefficient’ UK corporate bond market, and to sell them as they approach his target yield. His largest holding, Canary Wharf bonds, are close to his target and he says he is therefore about to sell them.
He also likes Fixed-linked Finance (Eurotunnel), General Electric, Chester Asset 5 (MBNA asset-backed bonds), and All America Global.
McKenzie’s portfolio consists of around 200 holdings. About 150 of these are in high-yield, or junk, bonds, which make up only 17% of the fund. He said: ‘We’re being very, very diversified here.’
Another 48 positions are in UK investment grade bonds, which make up 69% of the portfolio, while the remaining 4% consists of just two long-dated European government bonds.
He has picked European bonds because he believes these will outperform UK bonds on the assumption the UK will make an early entry into the euro.
However, he recently sold down his holding in mmO2: ‘We sold it down aggressively, there were ongoing market concerns and we were hurt to a small extent.’
He believes demand for corporate bonds will remain high because of the impact of accounting rule FRS17, the effects of an ageing population, the better yields relative to a deposit account and the lower volatility and better risk-return characteristics relative to equities.
Since launch, the Deutsche Corporate Bond Plus unit trust has risen 1%, compared to an average 0.67% gain among funds in the UK Corporate Bond sector.