The popular phrase ‘it’s time in the markets, not timing the markets’ maybe an axiom for equity managers but to some degree timing is paramount for debt fund managers.
Take Rubrics Asset Management’s Global Credit Fund, its top holdings contain paper issued by major European banks, a sector which is the marmite of the investment world. Some, like Terry Smith, won’t go near banks and from an equities point of view this may be reasonable.
“Normally in fixed income time is always your friend. You can afford to be patient, the problem with negatively yielding bonds is that you’ve got to get your timing spot on, for example is the new ECB head going to be Dovish or hawkish,” says the firm’s chief investment officer, Steven O’Hanlon, giving one example of the importance of timing for the asset class.
The reason the ECB chief’s policy would be important for bonds that are negatively yielding is that if they adopt a dovish stance and continue to operate a loose monetary policy, yields can become more negative and therefore investors can achieve some capital appreciation on their bonds.
He adds that an important issue with bank paper is when you buy them and what valuation you get it on. One of the key to this fund’s success is to ignore the ‘noise’ and concentrate on the fundamentals. The fund last went on a buying spree was in 2016 when there was panic over deflation. Mr O’Hanlon viewed it as being overdone and picked up paper issued by banks with incredibly strong balance sheets like RaboBank with a 6.8 percent yield as well as UBS and Credit Suisse.
This is not to suggest the firm blanket buy banks when they feel the market may have mispriced them, Mr O’Hanlon adds that he wouldn’t stretch out to Southern European banks in countries like Spain and Italy. A decision that events have shown to be extremely prudent. It is also not limited to buying only bank bonds with various investment grade companies in its portfolio.
The target paper the fund wants tends to be short duration, so is less likely to be impacted by rising interest rates, a topic that the firm’s CIO is understandably very attune to. His attitude to Fed chair Jerome Powell’s about turn regarding interest rates at the start of the year is that he was being pressurised by President Trump. Mr O’Hanlon says: “All Fed chairs make these kind of mistakes, Powell has come out and said he doesn’t want to be talking double Dutch anymore.”
Entry points
As said this fund works by buying paper at a time when it is paying generous yields and the firm think that fears are being overplayed in the market.
When asked that does this strategy mean that buying opportunities are few and far between, Mr O’Hanlon says the only year in recent times when there wasn’t a buying opportunity was 2017, which was a ‘perfect year’. He goes on to mention years which presented great opportunities such as 2011 with the sovereign debt crisis whereby banks were so desperate to issue paper they had very light covenants.
2013’s taper tantrum, whereby the Fed reeled in its quantitative easing programme, impacted emerging markets badly and therefore companies with exposure to those regions. Rubrics managed to buy mobile giant Telefonica paper that was yielding 5.5 percent a year. Just last year US behemoth General Electric ran into trouble and the fund was able to buy its bonds paying out a 7 percent coupon.
Who’s this fund for?
“In one sense we’re unconstrained from a benchmark point view but from a risk parameters point of view we’re very constrained. The volatility of the fund is incredibly low,” says Mr O’Hanlon. The main benefits of this fund for investors is for those seeking to lower the risk profile of portfolio but not reduce the top line performance.
The fund does not have a large allocation to high yield, with only 10 percent of the fund’s allocation being outside investment grade. While the firm likes subordinated bank debt it’s not particularly interested in the US high yield market. Also there have been some fears over the growth triple B bond issuance, with worries that some of these companies may face downgrades (and no longer be investment grade). The firm said this is mostly at the long end of the curve and Rubrics is mainly interested in short duration paper so is not overly concerned.
Rubrics Global Credit UCITS Fund
Fund size $463.7 million
Fees 0.7 percent
5 year annualised returns 5.2 percent
Top holdings Credit Agricole, UBS, Orange,
Net asset value growth
To read more about this fund click here
