‘Brexit has ac­tu­ally been fan­tas­tic for us’

The Daily Telegraph - Your Money - - INVESTING FUND OF THE WEEK -

Af­ter an in­cred­i­ble run since the fi­nan­cial cri­sis, bond in­vestors are en­ter­ing the un­known ter­ri­tory of a “lower for longer” in­ter­est rate en­vi­ron­ment. Bond funds have to work much harder to find suit­able hold­ings, not helped by a drought of suit­able bonds in which to in­vest.

Hen­der­son Strate­gic Bond, a “to­tal re­turn” bond fund, is of­ten tipped for fixed-in­come ex­po­sure. The £1.7bn port­fo­lio holds 50pc of its as­sets in in­vest­ment-grade cor­po­rate bonds and 30pc in high-yield cor­po­rate bonds, while the re­main­ing 20pc is spread be­tween loans, gov­ern­ment bonds, cash and other as­sets. It cur­rently yields 4.2pc.

Here the man­agers, Jenna Barnard and John Pat­tullo, dis­miss fears of a rise in in­fla­tion and ex­plain why they aren’t “chas­ing yield” by buy­ing lower-qual­ity in­vest­ments.

What’s your ba­sic method for choos­ing in­vest­ments? JP:

It all boils down to our eco­nomic view. We are pretty “de­fla­tion­ist” so want a rea­son­able amount of in­ter­e­strate sen­si­tive bonds [which can be ex­pected to gain value if in­fla­tion falls].

We don’t like cycli­cal busi­nesses, such as oil, ship­ping and air­lines, be­cause as far as we can tell they have no pric­ing power.

We pre­fer con­sumer-fac­ing, less cash-in­ten­sive busi­nesses such as ca­ble tele­vi­sion, health care or bev­er­age firms. We have about a quar­ter of the port­fo­lio in fi­nan­cial bonds, a mix­ture of banks and in­sur­ance. They tend to be larger com­pa­nies with a heavy UK bias.

Are you hav­ing to take more risk than five or 10 years ago to keep up re­turns? JP:

As this is a to­tal re­turn bond fund, we’re not slaves to yield. What we try to do is ed­u­cate our clients that in the cur­rent en­vi­ron­ment yields are go­ing to be lower.

Our high-yield cor­po­rate bond weighting is ac­tu­ally at one of the low­est lev­els we’ve run over the past 10 years. In­stead, we have got our yield by buy­ing longer-dated in­vest­ment-grade bonds.

JB: What hap­pens to the fund if the 3pc or 4pc in­fla­tion pre­dic­tions are cor­rect? JP:

Head­line in­fla­tion in the UK will rise. But what we learnt from the fi­nan­cial cri­sis, which fed into in­fla­tion be­tween 2009 and 2011, is that most of that gets ab­sorbed in com­pany profit mar­gins, and work­ers don’t have the wage power to de­mand that in­creases in prices be passed through. So in­fla­tion will rise and fade, as it did in 2011-13. It’s not some­thing we worry about.

What are you do­ing to nav­i­gate the ‘lower for longer’ en­vi­ron­ment? JB:

We’ve been buy­ing 10, 20 or 30-year in­vest­ment-grade cor­po­rate bonds, par­tic­u­larly in US dol­lars, with yields of 4pc-5pc, to lock in yield.

In July we added to float­ing rate loans to add di­ver­si­fi­ca­tion, but we make as­set al­lo­ca­tion changes grad­u­ally, so post-Brexit there haven’t been any dra­matic moves.

We also bought long-dated gilts. Brexit has ac­tu­ally been fan­tas­tic, as the Bank of Eng­land cut rates and sup­ported the cor­po­rate bond mar­ket.

There was a cur­rency hit, but we’ve got 45pc of our as­sets in dol­lars.

One strate­gic bond fund has ben­e­fited from the Bank of Eng­land’s re­sponse, its man­agers tell James Con­ning­ton

JP: Can in­vestors con­tinue to rely on bond funds? JB:

Clearly the cap­i­tal gains couldn’t pos­si­bly be repli­cated. Given where val­u­a­tions are you have to find niche ar­eas of the mar­ket.

Legacy bank­ing bonds are one such area. They are be­ing phased out, but es­sen­tially in the next cri­sis reg­u­la­tors want bond­hold­ers to bail out the banks, not tax­pay­ers. With these old bonds that doesn’t hap­pen.

We ac­tu­ally think the banks will try to buy them back from us at a premium – more than 10pc of the fund is in them.

Gen­er­ally, there’s a very low de­fault rate, but any client should only ex­pect the coupon [an­nual in­ter­est]. To make cap­i­tal gains from here is get­ting a lot more chal­leng­ing.

JP: Do you have your own money in the fund?


What would you have done if you hadn’t be­come fund man­agers?


I had zero plans. I left univer­sity and worked in Tesco stack­ing shelves. I have no idea what I would have done. I prob­a­bly would have been an eco­nomics teacher.


How to buy the fund as cheaply as pos­si­ble

The trust has a to­tal cost (the “OCF” or “TER”) of a year. Be sure to buy the right “share class”, which is “I”. The in­vest­ment shop through which you buy the fund will also levy a charge. Some will charge


a per­cent­age of the amount in­vested, oth­ers will ap­ply a flat an­nual fee. Our colour coded ta­bles at

tele­graph.co.uk/ in­vest­ing

will guide you to the cheap­est fund shop for your cir­cum­stances.


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