Investors contemplating an allocation to fixed income are faced with an unappealing prospect; low bond yields, tight credit spreads and low volatility.
Fixed income fund manager Tim Haywood can understand investors’ lack of appetite. The asset class is “troubled” but it is too big to ignore, he says.
Haywood, who is head of fixed interest and co-manager of GAM International Management’s Absolute Return Bond Strategy, believes the long rally in bonds, which ran for almost 40 years in some markets, encouraged a fairly passive approach to managed fixed interest.
“You can’t be passive in this market,” he says. GAM’s Absolute Return Bond Strategy is anything but passive. It invests in a diverse range of assets, including convertible bonds and investment grade credit, and it uses a range of derivative strategies.
Some research houses might classify such a fund as a hedge fund. Zenith Investment Partners classifies it under “alternative debt strategies”.
Haywood rejects these labels calling the fund a bond fund with a modern toolkit.
“Fixed interest assets are producing income of 2 or 3 per cent but investors are looking for 5 per cent. You can’t be passive to achieve that,” he says.
“You have to be prepared to go short, to augment income, buy protection and search the markets for assets that are cheap.”
Zenith gave the fund a ‘recommended’ rating in a report issued earlier this year. It says: “The fund is managed in a highly active manner, with GAM permitted to materially alter portfolio positions in response to forecast changes in market conditions or the direction of rates.
“The fund’s mandate permits fixed or floating exposures across developed and emerging markets, investment grade and high yield credit, asset-backed securities, foreign currencies and convertible bonds.
“The fund is also permitted to use a broad range of investment tools and techniques to gain market exposure, including both long and short exposures. GAM uses derivatives and will commonly elect to gain synthetic exposure in an effort to tailor positions and to enhance trade efficiency.”
Over the past five years the fund has produced an average return of 3.9 per cent a year. Its benchmark is the AFMA Bank Bill Swap Rate Hurdle, which was up by 2.6 per cent a year over the same period.
Over the 12 months to the end of July the fund produced a return of 8 per cent, compared to a 1.9 per cent benchmark return.