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Why experience is no guarantee of bond success

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by Robert St George on Mar 28, 2014 at 12:14

Data from Citywire Discovery reveal no link between a bond manager's experience and either long or short-term performance.

The bond managers with the sterling silver hair should have excelled over the past year. The theory was that the ingénues who had worked only through the prolonged bond bull run since interest rates began falling after the financial crisis would lack the nous to navigate tightening policy.

But the data from Citywire Discovery does not bear that out, as the chart on the next slide shows. Indeed, in the Sterling Strategic Bond sector there is no correlation between experience and either long or short-term performance.

The chart above plots managers’ 10-year risk-adjusted performance against their risk-adjusted performance over the past year. The size of the bubble reflects each manager’s experience. So the highest bubbles denote those who have done best over the past decade, while those furthest to the right have stood out in the shorter term.

No manager has claimed a place in the top right of the graph, suggesting that nobody has had the best of both worlds.

The most experienced manager is AXA’s A-rated George Luckraft, who has been in the game for almost 19 years. He is bottom quartile on a 10-year view, but top quartile over the past year.

Invesco’s + rated pair of Paul Read and Paul Causer have the second most experience in the peer group, with 15 years apiece in this space, but their record is almost the inverse of Luckraft’s: a sensational top decile 10 years, but a more modest second quartile spell over the past 12 months.

And to whom have investors been allocating over the past year? The Invesco duo currently have a 5.14% market share, while Luckraft commands a minuscule 0.23%. Rewind 12 months and Luckraft – who had the better intervening period – had the same fraction with 0.2%. But the Invesco team evidently traded successfully on their longer-term numbers, and boosted their market share from 4.4%.

The analysis comes from Citywire Discovery, a new desktop system that allows fund buyers and fund groups to access track records of over 9,000 managers tracked by Citywire. It provides unique insights into peer group analysis, performance comparisons and competitor analysis. For more details contact support@citywireinsight.com

Stephen Rodger, Baillie Gifford Corporate Bond

Citywire AA-rated Stephen Rodger is the second best manager in this peer group on a 10-year view, just behind Invesco’s Causer and Read, although at £357 million his fund is one of the smallest among these veterans.

Rodger now runs the portfolio with A-rated co-manager Torcail Stewart, highlighting a theme connecting many of the top funds in this sector: the importance of a team approach. In this case, Rodger employs bottom-up analysis on individual bonds married to top-down quantitative analysis of credit rating and duration, while Stewart adds event-driven ideas.

Their fund is also fairly concentrated, with exposure to between 40 and 60 issuers.

Absolute fund performance (three-year total return): 33.6%

James Foster and Alex Ralph, Artemis Strategic Bond

Artemis already boasts two stars in this sector: the A-rated pair of Adrian Frost and Adrian Gosden (pictured). But over the past year the best risk-adjusted performance has actually come from their + rated colleagues James Foster and Alex Ralph, and their 10-year numbers are solid too.

They have recently made some significant changes to their £629 million portfolio, buying both safety and duration by switching 8% of the fund into 10-year US Treasuries and selling out of high yield. The managers believe that ‘government bonds will continue to perform well for as long as equity markets remain in cautious mood’.

Foster and Ralph also expect this, in tandem with a long US dollar position, to dampen the fund’s volatility.

Absolute fund performance (three-year total return): 24.1%

Ian Spreadbury, Fidelity Extra Income & Fidelity Strategic Bond

One of the best-known names in this field, Ian Spreadbury, has two strategic bond vehicles holding a combined total of £1.9 billion but his risk-adjusted performance has been lacklustre over both timeframes.

Of the two, the larger Strategic Bond fund has the more diverse portfolio: 927 positions across 510 issuers versus Extra Income’s 335 and 194; and 49% in UK paper compared with 60% in Extra Income.

Strategic Bond is also more conservatively constructed: the portfolio has an average credit rating of BB+ whereas Extra Income is predominantly BB; it has 34% in high yield, 5.5% in Treasuries and 1.2% in cash compared with equivalent figures of 51%, 1.6% and 0.1% for Extra Income.

But for that additional risk Extra Income investors receive a higher yield, of 4.3% against Strategic Bond’s 3%.

Absolute fund performance (three-year total return): 26.5%

David Roberts, Kames Strategic Bond Fund

David Roberts’s strong 10-year numbers stand in contrast to his weaker recent risk-adjusted performance.

His £693 million fund, co-managed with Phil Milburn, has been left behind in part because it has stuck to bonds rather than using its 20% equity allowance under the IMA’s classification rules.

Its rivals that have excelled over the past year have profited handsomely from participating in the stock market rally: Invesco Perpetual Monthly Income Plus has 17% in equities, and George Luckraft’s AXA Framlington Managed Income fund 14.9%.

Absolute fund performance (three-year total return): 19.1%

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