The Standard & Poor's AA rated Old Mutual Dynamic Bond Fund aims to maximise performance in all market conditions by exploiting opportunities across a broad range of assets available in the fixed interest markets.
The fund is managed by Andrew Tunks, Head of Fixed Interest at OMAM, and Chris Higham, an experienced credit analyst.
Why is this fund called “Dynamic”?
The fund’s name relates to its flexible investment process designed to identify the best opportunities available from fixed interest markets globally. The broad mandate encompasses a wide range of investments, including high yield and investment grade credits, government bonds, floating rate notes and cash instruments. By having the freedom to allocate across this range, we can follow our best ideas and focus on the areas expected to produce superior returns and outperform at any given stage in the credit cycle. This also means that we have the ability to effectively go very underweight or exit entire holdings within a sector if we believe that the investment prospects are not very favourable. The only caveat is that the fund must have a minimum of 20% in high yield corporate bonds, in order to comply with IMA sector requirements, but otherwise we can invest wherever we like.
How does the fund’s flexibility benefit investors?
Given the ever-changing investment environment, dynamic allocation helps the fund to capture the benefits of the credit cycle. Not only are we able to provide the in-house expertise needed to make well-informed top down allocation between different sectors, but we also have a proven stock picking capability. Through active management of the portfolio we have the opportunity to optimise returns for investors, while at the same time reducing the potential performance risk associated with investing in a single asset class.
Is it just asset allocation that benefits performance?
Whilst asset allocation is important, stock picking can be even more so. Each holding is in the portfolio for a good reason, following in-depth research of the company, its management and the underlying characteristics of the security. There are no “holds” or “neutrals” because we only invest in those bonds which we expect to outperform. Additionally, the fund exploits differences in various bonds, whether they are in coupons, yields, credit ratings or covenants. And to this extent, the fund has a number of impressive success stories, for instance when some bonds were bought back at a significant premium.
How has the fund performed?
During what have been challenging times for global markets, the fund has achieved its aims of delivering positive absolute returns, as well as outperforming both its benchmark index and sector.
How is the portfolio managed on a day-to-day basis?
From the top-down perspective, we capitalise on the broad skills of our fixed interest team. This allows for dynamic asset allocation across the different fixed interest sectors, taking into account a number of factors, including macroeconomic conditions and the progress of the interest rate cycle. This is combined with bottom-up analysis, which helps to identify the winners and avoid the losers by looking at potential investments close-up. Our style is to carefully select individual stocks that we believe have the best risk/reward characteristics. For example, the risk of leveraged buyouts has been one of many such considerations, and an assessment of this forms part of the broader credit analysis and valuation work that we undertake.
To what extent are other team members involved?
Old Mutual has a very strong fixed interest team and we look to make full use of the available talent. Citywire AAA-rated Stephen Snowden manages our investment grade Old Mutual Corporate Bond Fund - rated AAA by Standard & Poor's and Forsyth-OBSR - and the investment team leverages off some of the best ideas in that fund in the Old Mutual Dynamic Bond Fund. In addition, we are able to draw on the skills and experiences of our global bond and currency managers, especially on broad macro themes. In short the old Mutual Dynamic Bond Fund makes use of the best ideas and views of the team as a whole.
(Source: Morningstar, as at 31 July 2007, bid to bid, net income reinvested, UK sterling). NB: when comparing performance of the Old Mutual Dynamic Bond Fund relative to its peer group, the IMA UK Other Bond sector, please note that it includes some equity-based funds which may be more volatile.
