Michael Scott, Schroders
The Schroders ISF Global Credit Income Fund, which launched today in Hong Kong, has been available for sale in London. It is co-managed by Patrick Vogel and Michael Scott.
The fund invests in both government and corporate bonds and has an overweight position in bonds denominated in pounds sterling and euros.
The fund uses as a reference benchmark the Bloomberg Barclays Multiverse ex Treasury A+ to B- USD Hedged Index.
“There are roughly 30,000 bonds and 4000 issuers included in the index,” London-based Scott told FSA. “It gives us the opportunity set, but we deviate from that index quite materially.”
The fund is unconstrained by the index, allowing it to choose sub-asset classes, derivatives such as convertible bonds and asset-backed securities.
“If you invest in a global benchmark fund, then you will have 70%-75% of the fund naturally in US dollar-denominated assets,” he continued. “Currently, we do not actually find dollars that efficient and attractive from a risk-return perspective, relative to euro, pound sterling and emerging markets.”
UK is cheap
According to FE data, around 20% of the fund’s assets invest in sterling-denominated bonds, which are trading at a relatively cheap valuation.
“Businesses in the UK are found trading at a material discount to European and US counterparts, given the critical concern over the UK’s departure from the European Union. From a risk-return perspective, we think the current valuations are too cheap, particularly for the highest investment grade bonds,” he said.
He said that concerns about Brexit and subdued economic growth in the country also justify the manager’s preference for high quality bonds, such as A-rated opportunities across the British bond market.
“It is fairly hard to have a clear view about how Brexit evolves. But my point of view is we are moving towards a softer form of Brexit than people may have thought likely six months ago,” he added.
In the euro space, the fund has increased B-rated bonds since the last quarter of 2017 because the manager believes the market is largely supported by improving economic fundamentals in the eurozone.
“Leading indicators [in Europe] continue to paint a very firm growth backdrop,” he said.
Liquidity issues
David Gaud, CIO of Pictet Wealth Management, has been wary of the liquidity issues in European high yield because of an “unhealthy and artificial” balance of demand and supply in the bond market. “Although volatility sounds unusual in the bond market, when it comes to crisis, it could be as big as on the equity side. [When] everybody runs for the exit, it could really hurt,” he noted.
Scott said liquidity is not a main concern in Europe. “Liquidity in some parts of the global high yield market is certainly more challenging than in Europe,” he said.
“We are investing in the liquid part of the global credit market, so we won’t own any CCC-rated bonds at this time.”
For instance, when the manager buys bonds issued by financial institutions, they are mainly senior bonds, which make it a priority to pay bond holders in case of bankruptcy.
The average credit rating of the fund is BBB.
As of the end of January, the fund holds 573 bonds in the portfolio. In terms of sector holdings, bonds issued by industrial companies account for 38.3% of the fund’s assets and financials for 34.1%.
Performance of the Schroders ISF Global Credit Income Fund versus its benchmark and the category average since the fund’s inception in 2016
