Investment: Schooled to show his mettle in the bond trade
the fund manager: james gledhill, m&g corporate bond
Wednesday 29 September 1999
He admits he was not entirely sure what unit trusts were, but noticed the daily prices in his father's newspaper. "I bought two trusts, one of which was an M&G trust invested in the UK and the other was in Japan. When I bought the Japanese trust the Nikkei was at 25,000. It subsequently went over 40,000 and then fell back to 14,000, which was when I sold out. But I still doubled my money, which tells you everything you need to know about currency risk in a unit trust."
This early experience didn't immediately determine his choice of career, because he opted to read metallurgy. "I got through university and didn't want to be an academic, nor did I particularly want to be an accountant - it would be at least three years before you were actually doing anything. I felt fund management would be challenging and M&G had a good reputation, so I applied."
At first Mr Gledhill worked on the UK equity team, with the people who had managed part of his inheritance a few years before. He says: "I spent 18 months on UK equities, with a smaller-company bias, then moved to an overseas desk, looking at commodities. This meant concentrating on markets such as South Africa and Australia, as well as gold and oils. That was very useful experience because you were exposed to a whole range of markets."
He changed direction early in 1995, moving to M&G's corporate bond team, taking over the management of its Corporate Bond Fund at the beginning of 1996. "It was not `Peppable' at that time, so the fund wasn't the size it is now, but it was clear we needed more people with equity experience on the bond side. It is easier to take people from equity-type analysis and teach them how the bond market works than to take them from a government bond background and teach them about equity analysis. Looking at corporate bonds really is a hybrid discipline."
This is a key part of Mr Gledhill's approach to the management of his fund, since he is primarily dealing with bonds issued by companies, rather than government-backed gilts. He adds: "A breadth of experience is very helpful because bond markets do not exist in a vacuum. Since I have also run property funds and an index-linked trust, I have covered just about every asset class you can think of."
Since corporate bonds became eligible for inclusion in Peps and Isas, investor interest in these funds has risen enormously, not least because they are able to offer yields significantly higher than those generated by equity investments. As a result, the M&G Corporate Bond Fund is now more than pounds 1bn.
A lot of investor attention is focused on the quality of the bonds such funds hold, but Mr Gledhill says this emphasis is misplaced. "Our rule of thumb for investing in corporate bonds is that it is 20 per cent credit risk and 80 per cent interest rate risk. The crucial feature is the interest rate. People get very hung up on assessing credit risk, but 80 per cent of a fund's performance is about getting the maturity and position of the bond along the yield curve correct."
Because of the higher risk involved in holding corporate bonds, compared with, say, gilts, investors tend to look at the ratings of such bonds calculated by independent rating agencies. The best quality bonds are rated AAA the next best AA down to A, BBB, BB and so on. Most fund managers consider bonds rated BBB or above to be "investment grade" and James Gledhill says the lower end of that spectrum is the most attractive, since the higher-rated bonds are more likely to show a declining yield.
"On the credit risk side, we do not try to be too clever and we have a concentration on A and BBB bonds. Large companies with stable balance sheets tend to have an A rating and the higher-rated companies tend to have undergeared balance sheets, which means they can cut their cost of capital by issuing new debt. That will affect their rating. What we are trying to do is invest in companies which are stable in their yield position and not liable to deterioration, so we concentrate on the lower end of the investment-grade bonds. This means we have a higher liquidity risk but this is more than offset by the higher yield."
It is also important to maintain a broad balance, particularly in view of the portfolio's size. Mr Gledhill says: "We have more than 130 holdings representing 112 companies and we have a rule that we cannot hold more than 3 per cent of the fund in any one issue." The largest holdings are Standard Chartered and Cable & Wireless (2.6 per cent each), followed by Slough Estates (2.3), Barclays (2.1) and Hyder (2).
In terms of sector coverage, the fund is influenced by the types of company which actually issue bonds. Mr Gledhill says: "There is a high degree of issuance by financials, utilities and property companies which have strong asset backing. Companies with strong and stable cashflows are most attractive to the bond market, so not all sectors are well-represented. There tends to be a premium for industrial companies, for example, because fewer are issuing bonds. We adopt a broad-brush approach on whether we underweight or overweight sectors. I am looking at the same basic information as the equity analysts, although I am looking for different things. For example, we have been underweight in utilities for some time, while in financials we own the weaker ones because as consolidation continues, corporate takeovers will result in upgrade of these bonds."
Mr Gledhill stresses the importance of maintaining a stable bond portfolio with the emphasis on a high, but sustainable, yield. "We are trying to buy and hold things. Transaction charges are lower with a bond fund than an equity fund, but so are the returns and you can burn money in transactions. We take all charges from income, unlike some competitors who take charges from capital, which is misleading in a bond fund, where there is very little capital appreciation.
"I am looking for good, solid, long-term investments, although if something is not performing it is out of the door. This means the fund has a long- term, relatively low-risk approach which can cope with short- term difficulties.
"For example, last autumn, with the Russian crisis when yield spreads were widening, a lot of people held stuff they shouldn't, and couldn't get out of, but I was happy to sit on my hands and ride it out."
Fund Manager: James Gledhill
Fund: M&G Corporate Bond Fund
Size of Fund: pounds 1.03bn
Fund Launched: April 1994
Manager of Fund: Since January 1996
Current Yield: 5.90%
Initial Charge: None
Annual Charge: 1.25%
Current Bid/Offer Spread: 0.30%
Minimum Investment: pounds 500
Minimum Monthly Savings: pounds 10
Standard & Poors' Micropal Rating (maximum KKKKK): KKKK
Fund performance (to 1 September 1999)
(offer-to-bid, with net income reinvested):
One Year 3.37%
Two Years 20.07%
Three Years 39.74%
Five Years 65.82%
Since Launch 63.80%
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