Fund manager update

  • Fund manager update
  • 7 minute read

By Andrew Metcalf

Performance

The Select Fixed Income fund returned 0.50% in February, taking year to date performance to 2.08%. In comparison, the IA sterling strategic bond sector returned 0.52% February, and 2.25% YTD. Given the very conservative positioning of the fund (low duration and strong average credit rating), we are very pleased that the Select Fixed Income fund continues to keep pace with the sector in the ‘risk-on’ excitement of the first 2 months of 2019.

Macro backdrop

February was another volatile month in the UK – driven yet again by Brexit-related geopolitical uncertainty. On the UK macro side, data was generally weaker than expected. Q4 2018 GDP growth was an anaemic +0.2% Quarter on Quarter, and 1.3% Year on Year. Inflation declined to 1.8% from 2.1%, while unemployment remained stable at 4.0%, with PMI survey data registering the weakest readings since July 2016.

In the US, macro data was generally robust. Q4 2018 Annualised GDP was 2.6%, beating market expectations of 2.2% growth. Inflation fell to 1.6% (partly reflecting weaker oil and fuel prices), unemployment actually increased to 4.0% from 3.9% - although this partly explained by an increase in the labour force participation rate. Average employee earnings increased by 3.2%, while PMI survey data remained relatively strong.

In the Eurozone, the data continued to highlight a declining growth picture. GDP growth for Q4 2018 was +1.2%, inflation declined to 1.4%, unemployment remained stable at 7.9%, and PMI survey data remained weak.

Portfolio activity

Turning to portfolio activity, we completed 2 major trades in February. Firstly, we reduced our exposure in Bank of New York Mellon to a 1.7% portfolio position following a 6% return over the past 3 months. Secondly, we added to our existing holding in the Nationwide Building Society 2019 bond. The bond, which yields 3.9% and matures in June 2019 is now a 4.5% portfolio position.

Duration and yield

On the portfolio construction side, duration increased to 3.4 years (0.5 years of which is a single Gilt holding), while the yield on the fund was maintained at 4.5%. We continue to believe that the combination of short duration and a 4.5% yield de-risks the fund from future volatility.

Outlook and strategy

While 2018 saw a significant re-pricing of corporate bonds, we remain cautious. For the first time since June 2016, valuations appear closer to fair value across all major currencies (sterling BBB credit spreads have widened to 199bps, versus 5yr average of 183bps; 10yr average of 248bps; and 20yr average of 216bps). In order to ensure capital preservation and deliver a high level of monthly income, we continue to seek out the best risk:reward ideas across investment grade, unrated and high yield bond sectors. We maintain our focus on stock selection reinforced by in-depth credit research, and continue to favour shorter duration corporate bonds in GBP and USD.

Close Select Fixed Income discrete performance as at 28 February 2019

 

YTD

2018

2017

2016

2015

2014

Close Select Fixed Income

2.1

-2.0

7.4

8.0

1.7

9.0

IA £ Strategic Bond

2.3

-2.5

5.3

7.3

-0.2

6.1

IA £ Corporate Bond

1.9

-2.2

5.1

9.1

-0.3

9.8

IA £ High Yield

4.4

-3.2

6.1

10.1

-0.7

1.3

Source: FE Analytics 05.03.2019; all are X Acc share classes; performance is total returns, net of fees with dividends reinvested.

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Important information
This article is only intended for use by UK investment professionals and should not be distributed to or relied upon by retail clients.  The value of investments will go up and down and clients may get back less money than they invested. Past performance is not a reliable indicator of future returns. The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.

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