Mark Gull, manager of the CGU PPT Monthly Income Plus fund, said the fund's recent underperformance ...
Mark Gull, manager of the CGU PPT Monthly Income Plus fund, said the fund's recent underperformance has been caused by its exposure to preference shares.
The CGU PPT Monthly Income Plus fund is bottom of the UK corporate bond sector over three months and one year to 6 September, having previously outperformed`the sector average for a number of years.
Over one year the fund is down 8.5%, on an offer to bid basis, and ranked bottom out of 73 funds in its category.
The fund gained 14.8%, on an offer to bid basis, over three years and ranked 33 out of 54 funds but has steadily dropped away from its sector average, although Gull pointed out that the principle aim of the fund was not to match or beat a benchmark.
He said: "The main objective is to pay a consistent monthly income, which we've been doing since November 1993. We are aware of our competitors but we do not specifically follow one benchmark or another."
The fund's current distribution yield is 7.89% but Gull admitted that recent demand for the fund has become "fairly flat."
Gull said his holding in preference shares, currently at around 15%, was the main difference between the fund and others in its peer group.
He said: "Two to three years ago we held moe than 50% in preference shares on the belief they would be bought back at a premium but this differential has gone out of the market."
Gull added the fall in buyback premiums has caused preference shares to fall in value, a trend exacerbated by the reluctance of companies to buy their own equity.
This is particularly the case with banks, reluctant to reduce their level of tier one capital. This permanent capital, traditionally made up of irredeemable preference shares but now also including some bonds, is of particular importance to financials involved in the borrowing and lending chain and also makes them more attractive in periods of consolidation.
Gull said 1998 witnessed a fair amount of buybacks in smaller issues such as investment trusts and breweries but this has now tapered off. The fund has reduced its exposure from 50% to 15% and Gull said he recognised, with hindsight, that preferentials were expensive.
He added: "Preferentials are now at reasonable value. If talk about buybacks is revived we will benefit but we are also moving into investment trusts with a growth factor."
The fund's 73% weighting in corporate bonds is further split into financials, structured bonds, utilities, debentures, corporates, property and high yield.
The trend in corporates has been towards gearing and getting the most efficient balance sheets, according to Gull, who said he had been underweight utilities on these concerns.
He said: "A lot of companies are no longer looking at how to get the best possible credit rating but for their most efficient relative to their investment plans."
Gull said he liked financials because they value ratings stability and are constrained from gearing by their regulators. This gives them financial ratings stability and means mergers do not pose credit problems.
Property is not as sound and companies in the consumer sector face a challenging environment with their margins and credit ratings coming under increasing pressure, according to Gull.
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