For a team that has set its sights on being one of the top five fixed income managers in the UK, the Henderson bond team seems to be well and truly on the right path.
Under the head of retail fixed income John Pattullo, Henderson Global Investors manages seven retail bond funds with about £3bn under management.
Pattullo and Jenna Barnard’s £858m Henderson Strategic Bond fund, one of the pioneering funds in the bourgeoning space, is the jewel in the group’s crown. Strong investor interest on the back of solid performance through the 2008 downturn has helped the vehicle grow from just £300m at the beginning of 2009.
The addition of the former New Star funds just over a year ago has also added a new dynamic to the range, with the majority of the acquired assets under the stewardship of highly regarded industry veteran James Gledhill.
With the addition of Gledhill and the New Star offerings, Henderson is confident it has put in place a suite that can cater for the entire spectrum of fixed income investor needs – in either total returns or income.
James, what was it like moving from New Star to Henderson. Was it a bit of a culture shock coming back into a major group?
James: I have worked at large companies in the past and I am not an enormous fan of bureaucracy and committees and what have you. But the reality is we almost have a little boutique in here, which I think is quite important. In many ways there is a good balance of the two.
John has kind of carved out a little retail team, which acts pretty much as a boutique. However, we have some of the advantages of the large company and the major structure.
For example, there is the pool of analysts we can dip into, a dealing desk of size and structure, resources to do the CDS and the futures, and the settlements/loans side.
In this little boutique, we do not feel burdened by committees telling us what we have to do, from an investment perspective at least.
My impression of Henderson is that we do what it says on the tin. I have known John for a long time, Jenna for slightly less, but still a fairly long time.
Considering the market environment and corporate uncertainty at the end of your time at New Star, did your arrival at Henderson give you a chance for a fresh start?
James: The fundamental instability in the market during December 2008 was by far and away the worst time in my career.
You had no liquidity provided by banks, plus the combination of a Christmas period when you do not get any liquidity anyway, even in a normal market, plus people trying to withdraw from funds in fairly large amounts. So we were in a situation where it was pretty hard to sell assets, but these funds provide daily liquidity and a lot of people wanted to come out because of the market and the other things that were going on.
What skills have you developed from your time with John and Jenna and vice versa?
James: There was quite a good synergy already. While Strategic Bond protected itself with CDS and the like, we both had elements of higher-yielding assets, which were under pressure. I had more pure high-yield credit, John and Jenna were not so much in high-yield credit, but they probably had more bank debt.
This worked quite well on the way out because Jenna in particular was very deep into the detail of the financials. I bought quite a lot of high-yielding banking debt in my first six months here, quite a lot of which was on Jenna and analysts’ recommendations.
I bring more high-yield experience than really has been here in the past, because John and Jenna have not been heavily involved in the breadth of high-yield names for a couple of years.
There is a bit more trading activity on John and Jenna’s funds, which is partly driven by the ability to use CDS, so they take a little bit more advantage of liquidity.
This is something the old New Star funds will do a bit more in the future. We are already using some derivatives to protect against interest rate risk.
John, the Henderson bond range has taken on a new look since the arrival of James and the New Star funds. Are you pleased with how the overall proposition has developed?
John: Our view on bond funds has always been they should be focused around outcomes, not sector constraints. So if you have an income fund, you should provide income. If you have a total return fund, you should have the ability to asset allocate to achieve a total return objective.
Our Preference & Bond is obviously our quarterly income payer, and then there is the Strategic Bond fund, which is tied in very well with the wave of money coming into this area. I call it a “strategic wave”, because there does seem to be structural shift going on in fixed interest.
At least there is on how some people want fixed interest portfolios managed, on behalf of managers like Jenna and I.
James rather nicely complements that approach, as his old New Star funds pay monthly income, which is a key differentiator. I think this is going to be a huge market as well.
I believe we have a solid range for the moment and into the future. We have monthly income, we have quarterly income, and we have total return.
We also have various gradations of monthly income under James’ range and, from what we gather, there are not too many people that can pay monthly income.
Generally, we do not want James to be known as the high-yield guy, he is the income guy. Jenna and I are more the total return providers.
Jenna, you and Henderson were one of the pioneers of the strategic bond offering. How have you viewed the rise of the sector?
Jenna: We were very early; we launched Strategic in late 2003. What we set out to do was to differentiate ourselves from the first generation of strategic bond funds, which were broadly 50% high yield, 50% investment grade with flexibility for +/-10% either way. We thought this approach was way too restrictive.
Additionally, we got credit derivative capability in early 2007, which enabled us to take the strategic concept to another level. It was really useful in hedging a lot of the credit risk in the portfolio.
We are keenly aware more investment grade return comes from gilts, certainly given where spreads are today. We should expect that in the future.
The ability to asset allocate is really important, rather than just buying the UK corporate bond sector, almost as the default option, because you are inherently buying a lot of interest rate risk if you are doing that.
To us it makes complete sense to separate the interest rate decision and the credit risk decision. We can do that with derivatives and by allocating cash in the portfolio. To me it just seems like a sensible concept.
We have seen a lot of new funds being launched, which is a good thing. It is a kind of a confirmation the concept works and has some validity and is appealing to people.
But you need to examine strategic bond funds carefully; it is not a homogeneous group. You have to look under the bonnet.
Why do you think the concept has taken off?
John: I remember one guy at a conference telling me he did not have to worry about bonds any more, because he has given away responsibility to us. But that is the point, bonds are fiddly, they are esoteric, there is a funny language, there is a whole load of stuff. Why should an IFA or intermediary spend all this time trying to understand the bond market when the majority of his risk is asset allocation?
One thing we do get tired of hearing is how XYZ strategic bond fund, which launched last year, made 40%. My five-year-old could have done that. There have been a lot of opportunistic launches – and rightly so. But in my mind the test was really how you got through the year before.
You have been short on gilts for nearly a year now, have you been surprised by the recent rally in the flight to quality during the eurozone concerns? Where is there current value in your opinion?
Jenna: 10-year gilts continue to trade in the range of 3.5%-4.1% as they have for over a year now. In the context of the market risk aversion surrounding Greece it has not been a huge surprise to see them move back towards the lower end of that range, but we feel there is little room for complacency at current valuation levels. We continue to find value in the fixed income in parts of the credit market rather than in sovereign bonds.
You all seem at the moment to have the same kind of view on the world?
James: We have a fairly similar view of the economy, but actually quite differently positioned portfolios in many respects. This is partly due to the structuring of the portfolios. The Strategic Bond fund is out there and deliberately taking more aggressive asset allocation decisions than the High Yield fund, for example.
While I have started having an interest rate position, I have only minus half a year and John and Jenna have minus two and a half years. I am looking at some point to increase that a little bit, but it is quite a different position at this stage.
We do actually have a broadly similar view of the world, but have implemented it in slightly different ways, in slightly different degrees.
Jenna, you are turning down quite a lot of new high-yield issuance and have not bought a lot of new investment grade deals for a long time, where are you putting your steady inflows?
Jenna: We are not hoarding cash. Insurers still offer some value and we like a bit of banking. We have also added quite a bit to the loans
market. In this situation, you tend to scrap around in the secondary market. We have to be in something. But there is some frustration at the lack of quality high-yield supply.
Could you explain your view on financials?
Jenna: There are two themes. One is obviously the cyclical recovery and the second, which has more focus at the moment, is the re-regulation of the sector. John often says de-regulation of certain sectors turns out to be very negative for equityholders.
On the other hand, as politicians and regulators make these institutions more conservative, lowly levered, and perhaps restrict their business activities, from a bondholder perspective it is a great story.
This is because you are lending to a more utility-like institution and still get a very healthy yield. The resulting focus on buybacks and exchanges of financial bonds means there is a lot of positive event risk in the banking sector for bondholders, whereas there was obviously a lot of negative risk two or three years ago.
What is the expectation for the rest of the year and into 2011?
James: We are going to get to a point in the not-too-distant future where central banks are going to have to stop saying it is an ‘extended time’ before rates go up, and actually begin to face up to the realities. I do not think the market will find that process very comfortable.
Finally John, from a team perspective, are you happy with the position you are in?
John: Compared to many of our competitors, I think we have a pretty nice range. For people who want specific targeted income funds, or asset allocation funds, we have most bases covered.
But that is what we want, we need to compete with M&G and Invesco Perpetual and the like. We want to be a top five bond player in the UK, simple as that. I think we are close and with these guys we have all the capabilities, all the infrastructure and the support needed to do it.
