By Jake Moeller
Lipper's Jake Moeller reviews highlights of a meeting with Chris Bowie, Portfolio Manager, TwentyFour Corporate Bond Fund, on August 26, 2015.
The new TwentyFour Corporate Bond Fund is the sister of the highly successful (and Lipper Award-winning) TwentyFour Strategic Bond Fund. Launched only in January 2015, the fund is designed to perform against a relative benchmark (TwentyFour will shortly launch an absolute return bond fund) and is not slavishly devoted to maintaining a high yield. Mr. Bowie is a fund manager obsessed with liquidity. "You won't find any private placements or unrated securities in this portfolio," he stated. "I like quality and I want a small, compact portfolio."
Indeed, this fund is refreshingly compact. With only 70 securities, it is very small compared to some of the large corporate bond funds occupying the U.K. market, and Mr. Bowie doesn't expect his fund will likely hold a significantly larger amount of holdings. In a credible move TwentyFour has recently stopped marketing its Strategic Bond Fund (at £750 million) to new clients in order to prevent pressure to increase the number of lines. TwentyFour has undertaken to similarly protect the Corporate Bond Fund from capacity constraints, should that need arise.
The fund is designed along similar lines to Mr. Bowie's previous Ignis Corporate Bond Fund, with an emphasis on delivering risk-adjusted returns across all sources of alpha, including duration and yield curve, stock selection and assets, country rating, and sector tilts. Mr. Bowie has an excellent pedigree in all aspects of corporate bond management and carries an enviable performance track record, once ranked by Citywire with the fourteenth best Sharpe ratio of all funds globally.
Table 1. Composite Performance* of Chris Bowie from December 31, 2008 to Present within IA £Corporate Bond Sector Quartiles
Source: Lipper for Investment Management.
As a former computer programmer, Mr. Bowie has built his own system for examining risk/return that gives him some unique insights, particularly in constructing his credit buckets. "My system calculates a risk-adjusted return metric for every single bond," he states. "This examines the last three-year cash price volatility for a bond and compares it to its current yield. If a bond is yielding 5%, but its three-year cash price volatility is 7%, that is quite a poor investment. If it is yielding 4% but has cash price volatility of 2%, this is much more attractive."
The fund has a very large position in BBB-rated securities at a whopping 44% (compared to the sector average of 38%) and a large component of BB-rated debt (16%), mainly around the five- to ten-year part of the curve. Mr. Bowie is also keen on corporate hybrids, with a 12% exposure there. "They've been good for us," he states. "We have been selectively overweight for a while now." Using his proprietary value system, Mr. Bowie cites the example of his preference for a Barclays Upper Tier 2 position that appears to have the wrong cash-price volatility for its rating. "It's a no brainer!" he states. "If you buy the Barclays BBB on the same yield, you've increased your cash-price volatility three times for a single notch improvement in credit rating."
Table 2. Comparative Performance of Various Asset Class Proxies since 2000.
Source: Lipper for Investment Management. Past performance does not guarantee future performance.
For a fund manager whose week has just commenced with the "Black Monday" selloff in global markets, Mr. Bowie is strikingly calm and composed. "It's not yet a solvency event," he states. "This is a big question about growth." While his tone is reassuring and his longer-term investment thesis is relatively intact, he does concede the crisis has warranted a few changes to his positions. He has just increased the duration of his portfolio from 7.1 years to 7.4 years (the sector average is 7.5 years) on the back of the selloff in Treasuries on Wednesday, August 26. This has created a partial hedge against the credit risk in some of his higher-beta names. He has also sold a small amount of his AT1 (additional Tier 1) bonds to further bring down his beta. "We expect further short-term volatility in equities markets," he states, "and we don't want to be selling bonds into the cash market. But we do want to mitigate some credit volatility."
While Black Monday hasn't forced a redesign of Mr. Bowie's overall strategy, it has placed emphasis on the outlook for inflation. "Until a week ago I thought the most likely thing was that the Fed would raise rates in September, the Bank of England following suit in Q1 next year, that we would have a normal recovery where inflation starts to gently rise, and we would see wage pressures elevate." he states "But now, I'm wondering with what's happened to oil and volatility and the noise out of China whether deflationary risk is more of a threat." This concern comes despite Europe's supportive quantitative-easing program and increasing business confidence and is also reflected in the fund's duration increase outlined earlier.
Table 3. Proportion of IA Sterling Corporate Bond Sector by Fund Size Ranking
Source: TwentyFour AM. Data as at April 2015.
The fund currently holds 14% exposure to gilts and supranationals. Mr. Bowie is well aware of outflows from competitors' funds in the sector and the potential for investors to undertake a broader rotation out of corporate bonds. The gilt position and the high level of highly rated names is protection for him, should this occur. He argues, however, that corporate bonds should be an ongoing component of investors' portfolios, with the long-term performance profile (even including 2008 - see Table 2, above) measured by the iBoxx Non Gilts BBB Index since 2000 offering considerably better performance with lower volatility than equities. He notes also that there are some headwinds for the asset class, but an active fund that examines the drivers of volatility is best placed to protect capital.
There are many things going for this new launch. TwentyFour is a vibrant fixed income specialist that has made a canny hire in Mr. Bowie. His pedigree is strong, and-although he is running what is currently a defensive portfolio-his unique processes bring a fresh dynamic. Furthermore, the concentration of flows in the sector (see Table 3, above), with 70% of the entire sector contained in the ten top funds, should be of concern to all investors. A small and nimble fund has much to offer.
* The composite is constructed in the private asset module of Lipper for Investment Management as follows: Ignis Corporate Bond Fund from 31/12/2008 - 30/6/2014, IA £Corporate Bond sector from 1/7/2014 to 13/1/2015 & TwentyFour Corporate Bond from 14/1/2015 onwards.