Juliet Schooling Latter, research director FundCalibre, continues her three-year track record series for Professional Paraplanner with analysis of the Aegon Strategic Bond.
I’d imagine few of us miss the challenges of lockdown last year. Barring a quick bit of daily exercise, for me it was largely a case of being stuck indoors, typically on a work-related Zoom-call, whilst keeping a close eye on the kids.
I think we all appreciate the gym and the pub a little bit more today – but for bond managers, the aftermath of the sell-off might well be looked back upon as halcyon days where there were opportunities wherever they looked.
However, we are now back in a market with little value and falling yields. For me the best way to approach the bond market today is through a total return offering like this month’s fund.
Managed by Alex Pelteshki and Colin Finlayson, the Aegon Strategic Bond fund is backed by the huge resource of the Aegon fixed income platform of 143 investment professionals.
The fund’s core investments are in government, investment grade and high yield bonds, with exposure to the latter capped at 40 per cent (investments in emerging market bonds and asset-backed securities are included in that cap).
The fund targets six sources of alpha. Top-down macro views will help shape duration and curve positioning. Credit strategy and relative value are used to frame the asset and ratings allocation, while bottom-up research will then lead security selection and sector allocation.
The process starts with a monthly global meeting where all major markets are scored. Both managers use the views as a broad basis for their positioning before looking at asset allocation and credit risk positioning with the support of the global macro strategy team. Duration and curve positioning is then evaluated with the help of the global sovereign, rates and currency team. The global research team will then be used for sector and security positioning.
The managers also use ideas that will protect the portfolio if their broader views are incorrect, working in tandem with the risk team.
Since the appointment of Alex and Colin in 2017 and 2018 respectively, the allocation to high yield bonds in particular, has become more dynamic and flexible. This was evidenced in 2020, when the fund entered the year with virtually nothing in high yield before the managers added risk back into the portfolio in March after the sell-off – adding considerable alpha as a result.
The team has subsequently held almost nothing in high yield throughout 2021, while fears over rising inflation saw them short treasuries rather than taking credit risk earlier in the year.
But what about those investment opportunities? A strong allocation to Greek bonds over the past 18 months is a perfect example. Alex points to a scheme set up by the IMF and the EU playing a key role in slashing bad loans in Greek banks from 50 per cent a few years ago to 12-13 per cent today.
“This is a massive deleveraging story, so we’ve owned subordinated bonds and think there is some upside left,” he said. “Greece is the biggest recipient of the pandemic funding scheme, which should give it the next kicker.”
The team believes markets face two possible scenarios in 2022. One is higher inflation and central banks raising interest rates, the other an economic slowdown which could lead to a small sell-off before central banks step in again.
Alex says: “There will be more volatility and the moral hazard of more money being pumped into the system. That would be negative for government bonds, investment grade and high yield. In either scenario you need a fund that is not too correlated with other assets.”
Over the tenure of the new co-managers the fund has returned 30.4 per cent compared with 17.5% for the IA Sterling Strategic Bond sector average*, demonstrating their highly active and flexible approach can work any economic environment. The fund is one for any investor looking for access to fixed income in these challenging times.
*Source: FE fundinfo, total returns in sterling from 1 December 2018 to 3 December 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of Juliet and the fund manager do not constitute financial advice.
