Leading up to the much-anticipated FE Alpha Manager Awards on 14th April 2016, we asked managers featuring in our FE Alpha Manager Awards shortlist three key questions which not only sum up the past few months – but also, if magic was real, what they would conjure up if they had a magic wand!
We put the questions to the managers in the bond sector – a sector that has been very much under scrutiny in recent years… just hanging in there… waiting for the rates to hike… all that speculation, and the tantrums, then the waiting…
Manager: Richard Woolnough
Fund group: M&G
Thank goodness moment: As bond investors our ‘thank goodness’ moments usually come from credits we don’t own rather than those we do! There were a number of those during the year, particularly in the high yield energy sector, which we have been largely avoiding, despite the temptation to buy at distressed levels. We don’t have much conviction that the oil price is going to significantly rebound and defaults could really ramp up in that sector, so we’re happy to remain on the sidelines for now.
Toughest call last year: I think the toughest call has been holding onto our short duration position while seeing government bond yields continue to rally. It felt good being short in the spring, when bund yields went from zero to one per cent, but it has been uncomfortable since then. We still believe in the position because we think returns going forward are more likely to be driven by credit rather than further compression of government bond yields. Inflation in the US could potentially take off this year, and the market isn’t pricing that in.
If you had a magic wand, what would you make happen next year: I’d wave it at the FOMC to make sure they deliver on at least a few rate hikes in 2016!
Manager: Jeremy Wharton
Fund group: Churchhouse
Thank goodness moment: This moment was a sale, not a purchase; we had a big position in RWE 7% Hybrid and were fearful that a downgrade for the parent company would mean the credit (our holding) would be junked. We sold the entire holding at 105, one month before the worst fears were realised, at which point the price fell to 90.
Toughest call last year: Not joining in the buying frenzy in Jan/Feb when we felt there was no value in credits. As it turned out, February was the market peak in 2015, so we were right to resist.
If you had a magic wand, what would you make happen next year: I would make sure that Robert Peston became a Trappist Monk.
Manager: Anthony Smouha
Fund group: GAM
Thank goodness moment: Our top corporate holding is in Lloyds Bank, which is extremely strong and helped us ride the volatility. It is a good business model for the new conservative banking world. This resulted in good returns over the year.
Toughest call last year: The toughest call last year was guessing the level of generic rates. We are consistently concerned with rates rising, but rates hardly rose during the year and have declined since then. In US dollars, the 10-year government bond ended at 2.2694% versus 2.1712%, and the 10-year German bund increased from 0.541% to only 0.629%. We maintain balanced portfolios with floating rate notes counteracting our longer dated fixed rate bonds – so we try to be interest rate neutral.
If you had a magic wand, what would you make happen next year: 2015 Global growth surprises on the upside, a recovery in commodity prices, and credit outperforms more than expected.