The Old Mutual Global Strategic Bond fund has gone through various changes over the last three years, both in terms of managers and strategy but should investors have gone along with the changes or jumped ship?
The fund - now known as Merian Global Strategic Bond - was run by veteran manager Stewart Cowley – who used a total return approach to managing the fund with wide parameters – until 2015 when he left the firm.
Victoria Hasler, head of research at Square Mile Investment Consulting and Research, said: “The drivers of performance were often sweeping top-down macroeconomic calls, with Cowley looking at broad risk factors such as duration – interest rate risk – and credit risk to generate returns.”
Over his tenure from 2009 to 2015, the fund outperformed its average peer in the IA Global Bonds sector and the Bloomberg Barclays Global Aggregates index, albeit only just, as the below chart shows.
Performance of fund vs sector vs benchmark over manager tenure
Source: FE Analytics
However, in 2014 – his last full year in charge – the fund was a bottom quartile performer having lost 2.13 per cent. In 2015 the pattern continued with the portfolio down 4.35 per cent, although much of this came after his departure.
“Cowley stood down from Old Mutual admitting he had fallen out of love with bond fund management and that he was finding the markets more difficult to interpret,” Charles Stanley Direct pensions and investments analyst Rob Morgan said.
“While the fund retained the well-resourced fixed interest team at Old Mutual, it definitely lost the personality and esoteric nature that Cowley gave to it.
However, Hargreaves Lansdown research director Mark Dampier said a large reason for his departure were questionable investment calls.
“All bond managers are a lot more macro but he had some particularly strong views and he got completely taken out by shorting most of the bond market, as far as I can remember,” he said.
“He wasn’t the only one. There were a lot of other bond managers – who we knew well before 2008 – who had pretty good records but basically made the same mistake.
“They all thought that bond yields would jack right back up and that shorting US Treasuries and gilts would be fantastic and as it turns out it was a complete disaster.”
Dampier added: “I think I have seen more bond managers carried out since 2008 than anyone else and he was one of them… I think the pain got too much for Old Mutual.”
Cowley was replaced by Christine Johnson and John Peta, who managed it using much narrower risk parameters and positions closer to the rest of the peer group.
Their “pragmatic” approach was very different from Cowley’s focus on government bonds, with the duo adding corporate bonds into the portfolio, essentially steering it more in the direction of a strategic bond fund rather than a macro-driven fund, Charles Stanley Direct’s Morgan said.
The pair did not last long together on the fund, however, replaced in 2016 by current managers Nick Wall and Mark Nash.
Over the Johnson/Peta tenure, the fund returned just 3.07 per cent, while the sector peer was up 17.54 per cent and the index gained 13.13 per cent.
The current managers have fared a little better. Since taking over they have made a loss of 1.22 per cent, below the sector’s 3.27 per cent gain but higher than the 1.87 per cent loss for the benchmark.
Performance of fund vs sector and benchmark over current managers tenure
Source: FE Analytics
Square Mile’s Hasler said: “This latter pair have once again changed the way in which the fund is run, managing it with a performance target of 3 per cent gross of fees – equivalent to circa 2.5 per cent net of fees – above the benchmark, the Barclays Global Aggregate index, over rolling 12-month periods.
“This will mean that the fund is run to slightly tighter parameters than the investors of three years ago will have been used to, although that is not to say that the current managers are afraid to express their views in the fund.”
This was as a result of a lengthy restructure within its fixed interest team and leaves the current managers in between the two styles of Cowley and Johnson/Peta.
Dwindling assets since Crowley’s departure have been an expected issue, although flows have stabilised now.
But Informed Choice managing director Martin Bamford said despite this it is not a fund he would recommend.
“The three-year track history tells the story; a fund return of 4.9 per cent compared to sector average of 19.6 per cent for the IA Global Bonds sector,” he said.
“This is a fund ranked in the fourth quartile over one, three and five years. Whatever Nash and Wall are doing as managers of this fund simply isn’t working, and it’s no surprise that investors are jumping ship.”
Instead, he would suggest investors look towards IA Global Bonds sector heavyweight M&G Global Macro Bond, run by Jim Leaviss, which has returned 21.55 per cent over the past three years.
Performance of fund vs sector over 3yrs
Source: FE Analytics
“The fund offers a great deal of flexibility and can take long or short positions across global bond and currency market,” said Bamford. “This flexibility could prove valuable as monetary policy eases across the world and bond portfolios require repositioning to preserve value and exploit opportunities.”
For the Old Mutual fund to improve, Charles Stanley Direct’s Morgan said the new managers must look to build a track record to increase the assets under management because two years is too short a time frame to build a decent picture.
However, he added that while the fund is slightly below the sector average in their tenure, it has showed “impressively low volatility”. As such he said: “The jury is out for me.”
This is also the case for Square Mile’s Hasler, who said that while they do not recommend the fund, the team continue to monitor it.
“We will be keen to see whether the performance objective is achievable over longer time periods,” she said.
However, she noted that the sector is wide and there are many potential alternatives, depending on what outcome investors are seeking.
An example she would give of a flexible fund with relatively wide investment parameters could be the TwentyFour Strategic Income fund.
“This has a clear and tangible performance objective of 5-7 per cent total return, net of fees, over a market cycle which, although it is still early days for this strategy, it has largely met since launch in 2015,” she said.