Fixed income
27 Jun 2016

Safety and returns in an uncertain new world

The fallout from the UK’s vote to leave the European Union has highlighted the strength of the Old Mutual Corporate Bond Fund in times of volatility.

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The fallout from the UK’s vote to leave the European Union has highlighted the strength of the Old Mutual Corporate Bond Fund in times of volatility. As global equity and European currency markets tumbled on Friday, June 24, our very high-quality sterling investment-grade credit portfolio posted a positive return, proof of the solidity and safety of its assets.

Before the vote, we described it as a battle between passionate Leavers and potentially apathetic Remainers, which could result in a very tight outcome. Our positioning recommendation for either outcome was to hedge those companies that would benefit from a Remain win by holding a healthy allocation to the safest AAA-rated bonds, including UK government debt. As we predicted, the latter have rallied strongly since the vote result and continue to show strength on the expectation of a slowing economy, a subsequent cut in rates from the Bank of England and the possibility of the monetary printing presses being started once again.

As we have pointed out in the past, the fund focuses on quality, financially strong companies that produce a reliable income stream, which results in predominantly conservative positioning. This is aimed at providing a hedge against equities in times when macroeconomic risks emerge, whilst seeking to deliver a return in excess of gilts. The strategy has resulted in positive returns so far in June and in 2016.

As part of its diversified profile, the portfolio is invested in international issuers whose revenues are derived from across the world. Some of these names include AT&T, Phillip Morris, Total and Verizon. We favour highly-rated investment-grade bonds, which tend to fluctuate less in times of market sell-offs. Our UK holdings share the similar characteristics of relative safety and stability. We hold British companies that get their income from overseas, and that should benefit from a weaker pound. Examples of that are HSBC, British American Tobacco and Prudential.

Minimising risk is a key investment aim for the team managing the fund. As a new relationship between the UK and the EU – and indeed the possibility of a new EU framework altogether – emerges, we expect the picture for economic growth and corporate profits to change. As such, we’ll seek to isolate the portfolio from bouts of volatility, while looking for opportunities where the market misprices risk. In a world exposed to potentially seismic changes, it is worth remembering that consistency, low volatility and above-inflation returns are the safest means to preserve capital.

 

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