Fund Focus: Crisis causes cautious mood

Mark Astley, manager of the £14.1m City Financial Strategic Global Bond fund, is feeling bearish. “This credit crisis is the worst in a generation, probably the worst since the second world war,” he says. “The unwind is going to have a ripple effect for years to come.”

Since City Financial moved the fund from Neptune Investment Management in September 2006 and outsourced its management to Mr Astley at Millennium Global Investments, the portfolio has consistently been 100 per cent invested in AAA-rated government bonds.

Despite plummeting credit prices around the world, Mr Astley says he is not tempted to dip his toe into corporates.

“Our strategy is to offer investors a haven away from the concerns of the credit market,” he explains. “We think on a two to three-year basis there will be rallies, but it is not at all clear that there will not be further unwinding. We do not think we can be complacent and say there is fantastic value at this juncture.”

When Millennium took the helm of the fund, it was transformed into a sophisticated Ucits III vehicle, giving the manager the flexibility afforded by derivatives and currency overlay. Millennium has an in-house team of seven currency strategists, along with expertise in fixed interest hedge funds.

Across a concentrated portfolio of government debt denominated in what he calls “the big four” currencies – sterling, the euro, the dollar and the yen – Mr Astley makes extensive use of Ucits III tools to manage duration risk and play yield curves.

He says: “We can go short duration as well as long, so investors can benefit from yield declines and yield rises in a way that is impossible in a traditional unit trust. Also, the currency overlay is not wedded to the denominations of the underlying bonds themselves, so that is a separate source of alpha.”

For example, the Millennium team has navigated the steepening yield curve in the US caused by aggressive rate cutting by the Federal Reserve by using short, medium and long-term bond futures. Call options are used to manage risk and add value.

Mr Astley’s cautious approach and his focus on low-risk government bonds means the fund has not sparkled against its peer group, returning 4.2 per cent since launch against the IMA Global Bond sector average of 6.2 per cent, although its volatility for the period is below average at 1.4. By his own admission, investors have yet to flock to the product.

He points out the mixed bag of funds in the Global Bonds category, some of which offer what he describes as “dangerous” exposure to credit securities, and says he believes that while City Financial’s fund is not an absolute return product, it will appeal to investors looking for a secure core holding in their portfolios.

“The accumulation of leverage in the global financial system over recent years has been built on a period of financial innovation, low interest rates and deregulation,” Mr Astley says.

“All of these are going to be restricted now, and arguably the whole process could go into reverse for some years. That is the essence of the appeal of this fund – it provides a real anchor
in a challenging financial
environment.”

In the coming two quarters he anticipates a temporary dissipation of the fear that has gripped equity and bond markets since 2007.

Oliver Shah is chief reporter on Investment Adviser