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Unsung heroes

27th October 2023

Generally, I’m not a big fan of award shows. I find them too long, too boring, and often too self-congratulating. However, one that stands above the rest to me is the Pride of Britain Awards. For those that don’t know, it’s an annual award ceremony that honours British people who have acted bravely or extraordinarily in challenging situations. It is full of amazing, inspirational stories and is a welcome tonic to the doom and gloom that seems to be on our newsfeeds on a permanent basis these days. This year’s awards took place a couple of weeks ago and got me thinking about the positions in our funds that have performed well despite an extremely challenging investment backdrop over the past 12 months. What have been the unsung heroes of our funds?

For me, the answer to that question is our fixed income exposure. 2022 was touted as the death of the bond bull market that had lasted for 40 years. We prefer to view it as the re-birth of opportunity in active credit funds for the first time in a decade. Like a phoenix from the ashes.

As a reminder, at the start of 2022 we had effectively zero exposure to vanilla credit and government bonds. Why own them when government bonds were yielding less than 1% and credit spreads were at all time tights? Not exactly a great starting point for inflation beating net returns, the minimum objective we aim to beat. This positioning helped insulate our funds from the worst of the market falls through 2022. However, following the Truss/Kwasi budget debacle in September last year and the ensuing bond rout, we materially increased our exposure to actively managed credit funds which were offering the highest prospective returns in well over a decade. This was at a time when many investors were panicking out of fixed income. We mainly funded this increase through reducing our exposure to alternative asset classes that we access through investment trusts.

A year later and this has worked out very well in absolute terms. Man GLG Sterling Corporate Bond +20.2%, Morgan Stanley Emerging Markets Debt Opportunities +13.6%, TwentyFour Income +12.5%, Man GLG High Yield Opportunities +11.1%, Schroder Strategic Credit +10.5%, TwentyFour Monument Bond +10.2% and Close Select Sustainable Select Fixed Income +8.3% (FE fundinfo 24/10/2022 to 24/10/2023) have all performed admirably.

What about bond markets overall? Have we just ridden a wave of recovery for the asset class after a very tough 2022? The ICE BofA Global Broad Market Hedge GBP index (a broad index covering government bonds, corporate bonds, mortgage-backed securities and asset-backed debt) is up just 1.1% over that period. The active credit managers we have backed have trounced passive options.

The funds we own span many areas of fixed income, from investment grade to high yield, plain vanilla bonds to more esoteric areas like residential mortgage-backed securities and emerging market debt. What they all have in common is that they are run by talented, highly active fund management teams that have been able to take advantage of significant valuation dispersion and market dislocations across the asset class, to deliver inflation busting returns.

Unfortunately, it has not all been rosy and coming back to my first line we are certainly not in self-congratulating mode! One area of our fixed income exposure that has not performed well has been US and UK inflation linked bonds, which we have been steadily adding to as real yields have risen. In recent months this has resulted in a gentle increase to the duration profile of our funds at the expense of some credit exposure which has performed so well and benefited from spread tightening.

A big frustration from our perspective is that the strong returns from our fixed income exposure have been swamped by difficult periods for other parts of our funds – in particular the investment trust exposure which we’ve written extensively about in these blogs. Hence the tagline that fixed income has been our unsung hero.

Despite the strong returns over the past year, all of our fixed income holdings continue to offer yield to maturities close to the highs of the past 15-20 years that anchor their return profiles and should ensure they continue to be unsung heroes of our funds in the years to come.

Dan Cartridge – Assistant Fund Manager

For professional advisers only. This article is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC1313.

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