Coronavirus: confessions of a bond manager

Jeff Keen of the Waverton Sterling Bond Fund on how a timely decision in the lead-up to the sell-off, coupled with a little bit of luck, helped in the face of the crisis.

After any period of decent performance, fund managers tend to be congratulated for their skill in managing their funds. Those who have a bit of grey hair and an ounce of humility - possibly a rare character trait in the industry - are wise to keep a level head and acknowledge the fact that managing money is difficult and not always highly correlated with effort. 

Of course, hard-working investors with robust investment processes have a higher chance of success, but any manager has to admit that a bit of luck goes a long way. My fund, the Waverton Sterling Bond Fund, came through the first quarter of 2020 relatively unscathed and was never in negative territory, while the Sterling Corporate Bond index - around which a lot of my peers seem to gravitate - fell 10% to 19 March. On a company call, the chief executive officer jokingly said: “we might need to look at what Jeff is buying in that fund”. 

Unfortunately, there is no magic sauce, just an honest approach to looking after investors’ money and having the flexibility to invest in the right bonds. Better that than blindly investing in bonds that are offered by companies raising long-term finance in the bond market. We started this year somewhat concerned that the macro outlook was nowhere near as favourable as implied by the level of the stock market or the spreads in the credit markets. 

As a result, we were well into the process of reducing our credit exposure - particularly to weaker corporates - and raising our duration exposure as a hedge. We had also put in place some tail risk hedging – spending a small amount of capital on insurance against an unlikely event. In January, no one was expecting a global recession, so that insurance was very cheap.

In mid-January, I went on holiday to Singapore and Bali, which is where the little bit of luck comes in. In Bali, my wife and I visited a neighbouring hotel where we got chatting to the restaurant manager who told us that normally it would be full of Chinese tourists, but that they had all suddenly cancelled. Covid-19 was already hitting the headlines, but at that stage it was still regarded as a local problem in Wuhan.

I flew back to the UK on 31 January, the same day that two Chinese tourists in Rome were said to have Covid symptoms. During that week, I read in a research report that hospitality accounted for 10% of global GDP. Yet, for another two weeks, financial markets remained fairly relaxed about the chances of the virus spreading. For example, the S&P 500 index peaked on 19 February. A week back in the office, and we decided to further reduce our credit exposure by trimming some of our best-performing corporate bonds and those that we thought might be most at risk in a setback. Those proved to be great trades and looking back we only wish we had been more aggressive.

It’s clear that what set our fund apart was our ability to invest away from traditional indices, and working hard to find ways to protect our fund from an unwelcome downturn in global markets. 

Active management is in decline, but it surely makes a lot of sense, particularly in the bond market where indices are full of the most indebted companies, not necessarily the best credit risks. A little bit of luck helps, too.

Jeff Keen and James Carter manage the Waverton Sterling Bond Fund.