In the back
64 / 65
[ WHAT I BOUGHT LAST ]
Spread-implied default rates
have gone through the roof, with
investment grade effectively pricing
in about 30 per cent of the market
failing to service its debt
BMO’s Kelly Prior is using this “vanilla” offering to take advantage
of the risk/reward dislocation in investment grade bonds
Schroder Sterling
Corporate Bond
T
he recent
coronavirus
sell-off has
created a far better risk-
reward skew within
the investment grade
bond space. A bond is a
temporary arrangement
in which you lend
money, receive it back
at a later date and are
compensated for the risk
of default and inflation.
Until recently, the upside/
optimal return was
negligible – credit got to
levels where you never
lost money with a one-
year perspective. Now,
however, spread-implied
default rates have
gone through the roof,
with investment grade
effectively pricing in
TRUSTNET
about 30 per cent of the
market failing to service
its debt. Yet in reality, this
has never gone above a
few per cent before.
to help him source and
scrutinise investment
ideas. The sector
analysts are responsible
for maintaining up-to-
date credit research on
Vanilla essence
existing positions. They
A more “vanilla” offering are the primary contact
in the area of investment with company directors,
grade corporate bonds
but nonetheless Golan
is the Schroder Sterling
also tries to meet with
Corporate Bond fund,
these management
run by Jonathan Golan.
teams as often as he can,
A relative unknown when given the level of insight
he joined Schroders
it is possible to derive
in 2013, Golan quickly
from these meetings.
caught the eye of seniors
The analysts will score
and was promoted to the each credit from one to
position of fund manager four. More important
in 2015. This mandate is
for Golan is the credit
the sole focus of Golan
trajectory – essentially
who has at his disposal
an improvement/
the resources of the
upgrade story. The fund
Schroders analysts bank is refreshingly traditional
in its makeup, focusing
primarily on solid
investment grade
companies, although
opportunistically
dipping into high yield
at the margin.
Bucket list
Golan splits the
portfolio into two
buckets: compounder/
liquidity at about 70 per
cent and price action/
diversified returns at
about 30 per cent.
He generally holds
between 100 and 110
issuers, as well as a
variety of maturities,
especially in the
compounder bucket.
Position sizing is
determined by the level
of recovery in any credit,
rather than the spread
trajectory. The largest
single credit in the
portfolio will be between
2 and 2.5 per cent of
NAV. However, the fund
has hard restrictions for
every credit, based on
the rating: 4 per cent in
A, 3 per cent in BBB, 2
per cent in BB, 1.5 per
cent in B and 20 per cent
in those that are either
unrated or rated below
investment grade.
There is a size limit
on the fund as the
maximum amount
of money Golan will
run is 2 per cent of
the entire actively
managed UK sterling
corporate bond market.
This ensures the fund
remains nimble enough
to take advantage of
any opportunities that
present themselves. At
the time of purchase,
the fund was yielding in
excess of 5 per cent.
Kelly Prior is an
investment manager
in the BMO multi-
manager team
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