PSigma Investment Management and TwentyFour Asset Management have launched the TwentyFour Focus Bond Fund. The Fund has been designed and created for use by PSigma’s clients and will start with nearly GBP50m in assets.
The Fund has been specifically designed to generate a more predictable return for investors, which it will seek to do by only selecting bonds that are expected to redeem by 2016. By targeting a ‘redemption window’ in this way, investors can expect to achieve a relatively stable level of income and at the same time minimise the ‘duration risk’ that is inherent in most other fixed interest funds.
Importantly, because of the targeted redemption of the bonds within this Fund, the ‘default risk’ of the underlying bond portfolio will effectively reduce every day as the redemption window approaches. PSigma and TwentyFour believe that this makes the product attractive.
Commenting on the launch, Thomas Becket, CIO of PSigma Investment Management, says: “In our opinion this innovative strategy allows our clients to gain efficient access to one of the best risk/reward opportunities currently available within global financial markets. Furthermore, we believe that the strength of corporate balance sheets will be a powerful theme to drive investment returns in the years ahead.
“This Fund will also help us to bolster another key theme in PSigma’s investment strategy; the ‘Hunt for Yield’. In simple terms we believe the mis-pricing that has occurred in credit markets due to the chaos in European bond markets has left the relative and absolute yields on offer from corporate credits very attractive. With official interest rates “anchored” near zero and the yields available on government bonds at ridiculously low levels, we believe the relative yields on offer from European corporate bonds are currently very attractive. ”This Fund should enable us to deliver an extremely attractive yield of about 7% (net of charges), which is vital to our clients in a ‘low yield’ environment. Admittedly, we are arguably taking a higher risk of default than by investing in government bonds, but we feel that we are adequately compensated for taking this risk through the very attractive yields on offer. We believe that the redemption window selected for the Fund and the overall quality of the companies we are lending to makes that risk worthwhile.
”After the recent market rally we have reduced our equity weightings, in order to facilitate an investment in this Fund. It is our central view that we will be able to generate long term average equity returns through this product, with far lower volatility than that in equities. We therefore believe it is sensible to be holding lower equity weights in our portfolios (equities need growth for profits, which might be in short supply in the years ahead) and higher corporate credit weightings (the low but positive growth environment we are currently forecasting should ensure the repayment of debt). This Fund is the latest example of PSigma’s “thinking outside the box” in order to try and generate high quality returns in challenging investment markets.
”At the end of 2016, when the bonds have redeemed, we will then be able to reshape the portfolio to focus on the next opportunities that we see in global fixed interest markets.
”We are excited by the prospect of working closely with TwentyFour in the years ahead as we are impressed by their exceptional strength and experience in credit markets and admire their boutique structure. We believe that TwentyFour have the dedicated resources to do the in-depth credit analysis on individual bonds to complement our asset allocation skills.” Mark Holman, Managing Partner, TwentyFour Asset Management, says: “TwentyFour Asset Management is delighted to have worked with PSigma to create this innovative bond fund. We believe that the Fund combines our two Firms’ ‘top down’ skills with TwentyFour’s ability to select individual credits and we are delighted by PSigma’s decision to select us to run this mandate.
“By creating this Fund we have been able to take advantage of attractive valuations within corporate credit markets. Admittedly the yields on offer are not as attractive as they were in late 2008 or in October 2011, but the lower yields reflect that systematic risks have reduced and the companies we are lending to are in good health.
“We have been able to identify opportunities across a broad section of the market place where there are very attractive yields available. Despite the fact that we see many bonds in the financials sector as good investment opportunities, we have intentionally limited the exposure to the sector within the Fund to 20%.
”The Fund will mostly invest in lower rated investment grade names and the higher quality high yield companies, which is where we see the “sweet spot” for credit returns in the years ahead. In order to reduce default risk, we have deliberately focussed our investments on a relatively low number of favoured issues for a bond fund (the Fund will hold around 50-60 bonds) and will not take excessive credit risk in the lowest rated issues. At launch, the Fund will have an average rating of BBB and will hold 30% in high yield.”