For this month’s this three-year track record analysis, Juliet Schooling Latter, research director, FundCalibre, turns her attention to the income market and the Premier Miton Strategic Monthly Income Bond.
Famed investor and market forecaster, Marty Zweig, coined the phrase, “Don’t fight the Fed,” in 1970, explaining that Federal Reserve policy has a strong correlation in determining the stock market’s direction.
It’s a statement which has held true for the majority of the 53 years since then – although equities don’t seem so keen to listen in 2023! It was very much the case in the previous decade when the US central bank printed money to underpin the market, whilst holding interest rates at next to nothing to encourage investors up the risk scale. The result was great success for those investing in riskier parts of both the equity and bond markets.
For fixed income the days of a zero interest rate policy meant you could layer on as much risk as you liked and get better returns. But this has ended in the past couple of years, as monetary policy looks to disincentivise risky investment to slow markets down, making safer assets more attractive.
Today government bonds are offering in the region of 5 per cent*, while investment grade is in the region of circa 7-8 per cent***. But with dispersion on the rise across the bond market, does this mean there are still great opportunities to make further gains?
“We don’t need to be a stamp collector, we do not have favourite names or favourite bonds. We’ve always wanted good quality, liquid portfolios, ensuring we are able to take the best out of fixed income markets without taking on lots more risk. We are looking to take lots and lots of small profits from pricing anomalies and we work the portfolio hard,” that’s the view of Premier Miton Strategic Monthly Income bond fund co-manager Simon Prior.
Prior manages the fund alongside Lloyd Harris, with the pair joining Premier Miton in 2020 from Merian Global Investors.
This vehicle was launched in September 2020 and targets a steady monthly income, while minimising volatility and providing a better risk-adjusted income compared with both bond funds and equity income options. The fund is benchmark agnostic and tends to have a lower duration than the market.
This fund is highly active, with turnover between 300-500 per cent each year since its inception. Prior says a company could have one equity listing but up to 160 bonds, meaning one bond could be cheap one week, only to tighten the next. “You can sell it for another and continually optimise the portfolio,” he adds.
Examples on the primary market include the likes of Barclays and HSBC, which were sold two months and three weeks after their respective purchases in 2022, and both at a profit (102.1p for Barclays and 104.08p for HSBC)**.
Early inflation, high yield concerns and the banking opportunity
There are plenty of examples where the fund managers consider general market conditions before making investment decisions, including the current market phase and supply/demand dynamics. For example, the team were quick to spot the challenges of inflation back in late 2020. To counteract the threat, they quickly moved from an average of five to three years duration by January 2021, and were running the fund at roughly two-years duration (on average) over the next couple of years.
Harris says: “We were early on that trade, but we were well prepared when credit spreads bottomed in September 2021 and we got some very good performance off the back of that by being short credit and not running a great deal of duration risk.
“Things are different now as inflation comes down. Bond yields have backed up. We’re not expecting a return to zero rates, but we feel it is expensive here to be short duration and we are now back at the five-year level, because we feel we will see some disappointing data, particularly in the UK.”
Harris says although high yield bonds were the principal beneficiaries of monetary policy post the GFC – citing that at one point the riskiest CCC bonds were having deals cut at 5 per cent – this new environment will be much tougher as we are going through a prolonged cycle of debt restructuring in high yield. The fund currently holds only 8 per cent in this segment of the market***.
He says: “Investment grade companies are big and ugly enough to handle these new refinancing rates. Lots of these companies have finance for 10, 20, 30 years. The problem is these high single digit yields for investment grade companies will break high yield.”
By contrast, one area where the fund is bullish is banking, which accounts for more than a third of the portfolio****. The team believe the market has put the Credit Suisse bank collapse in March 2023 behind it, with Harris pointing to the fact that the banking sector now has far stronger balance sheets should we be headed towards a challenging period.“The stress with the Credit Suisse and SVB collapse was actually a buying opportunity. Whenever people question AT1s it is a good time to buy the asset class, because regulators designed it and are fully behind it.” Harris says.
As a relatively new fund it is certainly an interesting and exciting proposition for investors. This fund delivers a healthy yield (the current distribution yield is 5.7 per cent****), with the added bonus of it being paid monthly, while also offering additional capital gains by being very active in the quality, liquid portion of the bond market – something which has helped it outperform in the past three years. It may appeal to investors seeking a well-diversified and regular source of income.
Source: FE Fundinfo
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. Juliet’s views are her own and do not constitute financial advice.
*Source: MarketWatch, October 2023
**Source: Bloomberg
***Source: Premier Miton Investors, October 2023
****Source: fund factsheet, 31 August 2023
