Trustnet Magazine 61 April 2020 | Page 64

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 trustnet.com