Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process?
The Vontobel Fund - TwentyFour Sustainable Short Term Bond Income fund (SSTBI) seeks to provide investors with a sustainable fixed income solution that doesn't compromise overall returns.
Based on our well-known Vontobel Fund - TwentyFour Absolute Return Credit Fund (ARC), SSTBI deploys a tailored mix of positive and negative screening that is designed to reward companies for sound ESG practices.
Like ARC, SSTBI is an actively managed short term bond fund that aims to deliver steady returns in any market environment while keeping volatility to a minimum. With strict risk parameters and a focus on short dated investment grade bonds, the managers aim to sustainably capture nearly all the returns of higher risk strategies but with a fraction of the drawdowns expected in tougher market conditions.
At least two-thirds of the SSTBI portfolio must be invested in short dated (0-5yr) investment grade credit at all times. We also choose to limit the number of individual bond positions to around 100 (to allow the opportunity for stock selection alpha) and have a strong bias towards BBB rated corporate bonds (in order to target a more attractive yield).
The fund's sustainability overlay begins with a negative screen which rules out various ‘sin' sectors, but then importantly adds a positive screen which excludes any bond issuers we score lower than 34 out of 100. This actively rewards those issuers in the top half of the ESG distribution, helping to ensure clients' capital is being invested sustainably and responsibly while still benefiting from TwentyFour's specialist and active approach to fixed income.
How are you positioning your portfolio in uncertain times? (Max 200 words)
Over the last few months the team has reduced the portfolio's duration to under two years, increased exposure to 0-12 month bonds to more than one-third of the total allocation, and increased exposure to the floating rate European asset-backed securities (ABS) sector. This is aimed at defending the portfolio against the impact of inflation and more aggressive central bank policy by limiting duration, while allowing SSTBI to target the more attractive yields we're currently seeing in short dated bonds.
In addition, short term bonds possess some natural advantages that TwentyFour believes can offer investors some comfort at this uncertain phase of the cycle. First, they can benefit from ‘roll-down', which is the capital gain created by the natural fall in a bond's yield as it approaches maturity, an effect that is enhanced when yield curves are steep at the short end - as they are today. Another natural advantage of short term bonds, particularly those with around 12 months to maturity, is ‘pull-to-par', which reflects the reality that as a bond approaches its maturity date, it begins to ‘pull' to its par value as default risk becomes increasingly negligible and the cash price of the bond amortises, typically to 100.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
While rising yields have been painful for many fixed income investors - especially those holding longer dated assets - yields in short term corporate bonds generally look attractive to us given their relative lack of interest rate risk.
Right now, the team is looking to boost portfolio yield by making high conviction allocations to corporate hybrid bonds with ultra-short maturities. Because hybrids are expected to operate according to a call schedule rather than a set maturity, they typically offer higher spreads than vanilla corporate bonds at any given credit rating as compensation for the risk that a hybrid issue may not get called. At short maturities this risk is dramatically reduced but we find the yield tends to remain relatively high; today some short dated investment grade corporate hybrid bonds are trading with yields in excess of 5%.
The managers have also recently maximised their permitted allocation to European ABS, which as a primarily floating rate asset class comes virtually free of interest rate risk, removing a key danger in today's inflationary environment. Yields here also look compelling with a number of single A-rated European residential mortgage-backed securities, for example, providing yields of circa 3%.
This post is sponsored by TwentyFour Asset Management