Opalesque Industry Update - Jon Mawby and Steve Roth, co-managers of the GLG Strategic Bond Fund, have increased the duration of the portfolio over the last month as part of a move to exploit the more favourable risk-reward profile of absolute yields.|
The managers, whose fund has delivered a first quartile return of 22.4% since launch in November 2011, say that while they remain cautious about the potential for a further sell off in yields, they feel that the global balance of risk has shifted more favourably in the fund’s direction.
However, they continue to be mindful of the risks that still exist. “A key structural risk to credit and fixed income markets over the next 12-24 months is an unhinging of inflation expectations that could cause a much stickier back up in yields,” Mawby says. “If we see growth expectations pick up or see an exogenous inflationary shock (maybe through the tensions in the Middle-East) then this could be a key tail risk.”
The fund is also being positioned to get the most out of increased potential volatility, particularly against the backdrop of the European debt crisis.
“Whilst core Europe remains a key overweight we are also defensively positioned with respect to peripheral Europe, with less than 5% of NAV exposure,” says Mawby. “Again, we believe that the European debt crisis is far from over and whilst we took advantage of the attractive yields earlier in 2013 (having around 17% exposure) the risk-reward profile has become increasingly negatively asymmetric for the moment and we await a more attractive entry point post the German elections.”
Mawby says he and Roth continue to be cautious on US investment grade debt, given both the liquidity profile and value dynamics in that sector / geography.
“That said, we are involved in the new issue process there on an extremely tactical basis. From a ratings perspective, BBB and, on an idiosyncratic basis, high yield credit continue to offer the best risk-reward dynamics across geographies, particularly in light of the repressed default cycles created by continued QE from central banks globally.”
With this in mind, the managers are trading the fund extremely tactically and feel this is likely to continue into 2014, an approach Mawby believes should allow the fund to deliver an attractive return versus more traditional benchmark-constrained fixed income products.
“Overall the fund will continue to be run with a structure resembling a short duration credit fund as, for the moment, that is the most risk efficient area of fixed income markets.
“We believe a spike in global default rates is unlikely in the next three to six months given the repressed nature of the default cycle. However, given the effects of potential Federal Reserve tapering at some point a more normalised yield curve would be the catalyst for us to begin to unwind the skew of the portfolio to lower rated credit universe (BBB+ and lower) and move into less default sensitive areas of fixed income.”
 Source: Lipper. Period 08/11/2011 to 05/09/2013. The peer group average return was 13.68% over the same period.