Investment: Schooled to show his mettle in the bond trade

the fund manager: james gledhill, m&g corporate bond

IT IS unusual to find someone, even a fund manager, who had his or her first experience of unit trusts while still at school. But that was the case with M&G's James Gledhill. "I was about 14 or 15 when I inherited a small amount of money and had to do something with it. My parents would not allow me to spend it, so I ended up buying unit trusts."

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."

fundamental facts

Fund Manager: James Gledhill

Age: 29

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%

Start your day with The Independent, sign up for daily news emails
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific