Man GLG's Mawby: Investors In 'mishmash' Strategic Bond Sector Set For Disappointment

Mawby said funds in the sector are largely unconstrained in their investment approach, but there are only one or two funds that are "truly unconstrained", while the rest mainly have "an inherent bias". 

According to the Investment Association's definition, funds in the sector can invest across the fixed income spectrum with no prescription within the non-core parameters.

Mawby explained, however, that managers were all largely backing the same areas: "What tends to happen is managers use their unconstrained mandate to take big off-benchmark bets that are very sector-concentrated, driven by sectoral beta - a huge high-yield bias, a UK bias or a bias to interest rate risk, for example.

"[As a group] they take a big off-benchmark bet in a particular asset class and stick to that asset class."

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He added this makes his job harder as "one asset class is bound to outperform due to the embedded beta".

Mawby, who manages the £262m fund alongside Andy Li and is also lead manager on the Man GLG Corporate bond fund, added the sector is currently a "mishmash of all different types of fund".

He said: "You have emerging market funds, interest rate risk funds and high-yield funds."

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Mawby said investors expect flexibility from funds in the sector, and for unconstrained funds to use their unconstrained mandate to significantly outperform traditional passive and ETF products.

"At the end of this cycle a lot of people will be disappointed because of the embedded bias towards either an asset class or asset allocation," he added.

The IA (£) Strategic Bond sector has returned 2.7%, 9.1% and 20.2% on a one-year, three-year and five-year basis respectively, according to FE. The Man GLG Strategic Bond fund has returned 5.3%, 4.8% and 19.3% over the same period.

Top performers in the sector include the GAM Star Credit Opportunities and Royal London Sterling Extra Yield Bond funds, which have returned 57.6% and 47.9% over five years respectively.

Asset allocation

In terms of the Man GLG Strategic Bond's portfolio, Mawby said the fund was very underweight in terms of interest rate risk as the potential for "huge compensation and capital appreciation on an interest rate easing cycle" is no longer available.

In order to play this theme, Mawby is using the cash portfolio - which he said has an inherent duration of around five years - and derivatives to manage the overall level of duration to a level they are comfortable with. 

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He added: "We are using interest rate futures and, on the credit side, we have exposure to financials, which we feel will be more favourably impacted by a rising interest rate cycle.

"We are short European interest rate risk, but our net aggregate fund position is managed between 18 months and two years."