315 billion reasons to like high yield bonds?
According to Fidelity International, roughly $215 billion of US debt and €100 billion of European...
While diversity is a subject fund managers now regularly engage about with businesses, fund management companies themselves are still lagging behind.
The result is that, if you have an investment ISA or a pension, the chances are most of your portfolio is being managed by a man: believe it or not there are more funds run by men named David, than there are female fund managers! Of 1,496 UK-listed open-ended funds, 108 are run by managers named David (7.2%), but, just 105 have a woman at the helm*.
So last week, we at FundCalibre hosted our first speed-dating event of the year. Although it was the day before Valentine’s Day, romance was not the aim of evening. Rather, it was to introduce a number of financial journalists to some of those rare, female fund managers.
While the journalists looked for their own scoops, we asked some questions of our own.
Claudia: “An interesting holding we have in the M&G Emerging Markets Bond fund is a Rwandan bond. It’s not a bond that is in the emerging market bond benchmark, as countries have to issue at least $500 million of debt to be included. Rwanda has not needed to borrow that much so far. I think this shows good governance – not to ask for more than you need simply to get a place in the benchmark. The country obviously had a brutal civil war in the 1990s, but its turnaround shows what stability can achieve. It has now had many years of above-trend growth: 7%+ per annum vs. South Africa and Nigeria, where it’s about 2%.”
Amanda: “Allianz Strategic Bond is a favourite of mine within the Jupiter Merlin Portfolios. Mike Riddell, who we’ve known for a very long time, runs it. The fund is unusual as it invests mainly in developed market sovereign bonds. It has low correlation to equities and Mike uses different investment tools effectively. He also has a ‘sleeve’ of more adventurous holdings to create more value.”
Alexandra: Ceres Power is really interesting. It’s a fuel cell technology company that uses hydrogen and natural gas to create cleaner and cheaper energy. There is both a commercial and environmental need for its services. China’s biggest bus company has cross-country coaches, which use a battery that runs out on some journeys. Ceres has a ‘range extender’ that helps them complete journeys. I bought the stock in August and it’s already gone up 160%. It’s a small holding but has really added value.”
Lucy: “Darling Ingredients is an interesting stock that I came across about five years ago for the Baillie Gifford High Yield Bond fund. It’s a rendering company that basically processes animal carcasses and uses the components for lots of other things – like leather seats, bone china and renewable diesel to name a few! Randall Stuewe is the CEO and he was basically brought in to break up the company. But he saw value in the component parts and has really turned it around. He is now pushing for the company to get investment grade status.”
Abby: “Games Workshop. It’s a hobbyist business that owns things like Warhammer. It has a wealth of growth opportunities, having struggled for years, as the previous management wasn’t convinced about the Internet. The more recent CEO has reinvigorated the company. The good thing about it is it has captured customers at an early age – when they have little money – but keep them as they grow and become more affluent. And now those customers’ children are hobbyists too. The company sells through its own shops, online and via third parties now. And it is going international – the US is a big market for it. Licensing opportunities with movies and TV content are also now a possibility, which is great as it’s almost 100% margin.”
Deidre: “NextEra has been a been great holding for Investec Global Environment fund. It’s a US utility company based in Florida that has 80% lower emissions than its average peer and also owns renewables. If it were a country, it would be the seventh largest owner of wind in the world – more than France. It’s got a highly visible, high single-digit growth rate for the next few years and is growing its regulated business. Prices are low and customer satisfaction is high. It’s also very uncorrelated to other stocks in the portfolio.”
Claudia: “The team met an African delegation recently – from Gabon and Kenya. They had been buying back some of their shorter-dated bonds [bonds that will soon be repaid anyway] and issuing some longer-dated bonds. We bought some Gabon longer-dated bonds on the back of the meeting. Smaller countries like this tend to issue debt only about once a year. This is good – you don’t want smaller countries having too much debt. Larger countries may issue bonds more regularly.”
Amanda: “This afternoon we had a first meeting with a global equity manager. The fund has a very robust track record, strong process, and does well in rising markets while being resilient in falling markets. The manager has been in place since 2006, so we could really interrogate them. However, we decided not to invest. As a team, we usually know very quickly if we really like a fund and know how it would fit into one of our portfolios. This one didn’t have an obvious role in our portfolios. “
Alexandra: “We met with the management team of Blue Prism, which specialises in robotic process automation. For example, its software reads forms we might complete manually, and works out how to enter the details into a system through automation. There are huge opportunities in this space – only three companies in the world do it and only one is listed – in the UK.”
Lucy: A recent meeting was with Hurtigruten, the Norwegian shipping company that serves the Norwegian government and local population, as well as offering cruises to the Polar region. We already invest in it so it was a catch up meeting. It is big into sustainability, with smaller hydroelectric vessels, which are able to navigate shallower waters, getting closer to the natural beauty of the fjords – very different to the kind of floating hotels that dominate the cruise industry. One negative issue – they and other operators have – is that sometimes people die on board. So they actually have their own kind of morgue. I didn’t know that before!”
Claudia: “Emerging markets are normally higher risk, so worry comes with the territory. But with debt, the problem is usually: is the country or government going to default or not? So you really have to understand the risks and the bonds and make sure that the size of the positions you take are not going to be so significant that you can’t withstand one or two bonds going wrong. One of my riskier positions at the moment is in Ecuador where there is a relatively high refinancing risk, as a rising US dollar would hurt.”
Alexandra: “The Coronavirus. On the surface it looks like the market has discounted the risk. But looking at internals, investors are just buying defensive stocks and quality growth. There are still some companies that could be impacted significantly. Hopefully it will only be a 3-6 month issue, but with such an integrated supply chain there are a whole bunch of companies that are not able to produce anything at the moment – like Under Armour.”
Abby: “A profit warning I should have seen coming. If I’ve maybe seen signs but ignored them. It makes me cross with myself. “
Deidre: “Tesla. In an outlook piece I wrote in November last year, I said that 2020 was going to be the year of the electric car. I wanted to increase our exposure to electric vehicles, but Tesla wasn’t right for the portfolio – mainly because of its governance: Elon Musk takes a lot of risk and there have been issues over the treatment of the workforce. So we didn’t invest and, of course, the share price has skyrocketed since. But we’ve been able to make money in other ways – mainly via Tesla’s supply chain. We’ve invested in CATL, the biggest Chinese battery producer, for example. The companies in the supply chain take more time to appreciate, but they have and the fund is still ahead – even though we haven’t held Tesla.”
Amanda: “Inconsistency. Our aim is to deliver consistent returns and if this isn’t the case at any time – even short term – it worries me.“
*Source: Morningstar, November 2019