Man GLG Strategic Bond Fund | Performance Update - Q2 2017

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  • 06 mins 48 secs

Jon Mawby, Portfolio Manager, Man GLG, gives his Q2 performance update on the Man GLG Strategic Bond Fund.



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Man GLG Strategic Bond Fund Performance update – Q2 2017 Jon Mawby – Portfolio Manager, Man GLG

Hello and welcome. My name is Jon Mawby on behalf of the Man GLG Strategic Bond Fund and I am pleased to bring you our most recent quarterly update and an outlook at the end of Q2 2017. We were pleased to deliver a strong absolute and relative first quarter for our investors, with the underlying composite of the fund returning 4.08%1 net of fees over the period.

Looking at the macroeconomic backdrop and the quarter kicked off with significant uncertainty as geopolitical concerns surrounding North Korea and Syria, jitters around the French elections and the continued fading of the Trump euphoria weighed on investors’ minds. The subsequent outcome of events in France was, however, very well received by market participants. This dichotomy was clearly reflected in volatility terms with the VIX index in April posting both year-to-date highs and lows by the end of the month. Amid this environment the fixed income universe broadly hedged higher during April with core rates generally positive. This proved supportive for credit, where European assets outperformed the U.S. with higher beta credit and financials in particular doing well.

May again saw another mixed backdrop, while market volatility overall continued to collapse, events in Washington mid-month led equities to post their largest single-day decline so far in 2017, with the VIX marking its largest spike since Brexit. In the UK political uncertainty started to rise into month-end as polls started to point towards a potentially tighter General Election outcome than expected. Fixed income markets broadly performed well however, with core government bonds across DM and EM mostly delivering positive returns. French OATs continued to post strong returns in May, mostly driven by the risk-on momentum following the French elections. This fed through into another decent month for credit markets with peripheral Europe particularly leading the way regionally with financial spreads tightening across capital strucutre whereas non-financials were more mixed.

Despite all of this, the real event for fixed income markets came at the end of the quarter as hawkish noises in June from central banks, in particular the ECB, caused significant volatility. This was most visible in European government bond markets which suffered one of the largest sell-offs for many months. The main catalyst was a speech by ECB President Mario Draghi, judged by the market as signalling a change in stance to a more normalised policy. Further hawkish comments from the Bank of England and Bank of Canada also added fuel to the sentiment. Despite this, fixed income markets emerged with muted performance overall for the month across both core rates and credit in June. European returns were broadly positive while U.S. Treasuries were around flat for the month. Sterling bonds underperformed on political concerns and increased inflation expectations. European credit generally outperformed U.S. credit but not by a large amount while higher beta credit was stronger than higher grade in Europe with the reverse true in the U.S.

Overall, most areas of fixed income markets saw moderate gains during Q2; with corporate bonds comfortably outperforming government bonds which saw gains pared by the late June selloff.
We were pleased to be able to deliver our investors with a robust positive performance over the quarter as we stuck to our investment process and navigated these periods of localised volatility successfully enabling us to build on our strong start to the year.

1. Past performance is not indicative of future results. Returns may increase or decrease as a result of currency fluctuations. Please note that the performance data is not actual past or simulated past performance of an investment product. It shows a composite which is an asset weighted track record of all individual portfolios representing a similar investment strategy. An example fee load of 0.60% has been applied. Positive performance was primarily driven by strong gains from our core Financials positioning. We maintain our relatively large financials allocation which has been the core credit positioning of the strategy over the last 24 months. It has lagged other sectors and has taken longer than we expected for it to perform. We think the financial sector trend will be positive over the next 12 months and that financial credit will outperform on a risk adjusted basis given the attractive yield and expected spread compression to other sectors. Our high yield credit allocation was also positive over Q2 as were a number of relative value trades that we have initiated in recent months. The downside was very limited however we gave back some performance from our government bond portfolio, in particular through our U.S Treasury positioning while our capital protection strategies were also moderately negative for the quarter.

One recent tactical rotation we have made is to trim some of our financials exposure as valuations have richened. Our overall positioning is likely to remain broadly similar in the near term; however we have rotated this capital into a number of idiosyncratic opportunities in the EM corporates space as we continue to search for value.

The strategy has an attractive yield of around 6% given our strategy positioning to financials, selective corporates and high yield. This will be accretive to long-term performance and provide a buffer to potential volatility.
We ended the quarter with interest rate duration of around 2 years. On the interest rate risk side we remain an overall low duration profile because global growth has stabilised and there has been synchronised upswing in economic data, albeit at relatively low levels. In addition, hawkish central bank rhetoric with regards to the gradual withdrawal of stimulus has put a floor on bond yields. Ultimately, we think yields will be capped at defined ranges given the low levels of inflation and structural headwinds of growth, but in the interim the trend for yields remains higher.

We continue to manage interest rate duration in light of the recent comments from numerous central banks. We will continue to rotate out of expensive or over-valued assets and primarily look to re-invest should opportunities arise in the new issue primary market.

Realised volatility has increased slightly, but remains subdued by historical standards and we continue to monitor market technicals with respect to over-crowded positioning. Fundamentals remain fairly robust for credit and we expect spreads to continue to tighten into year-end albeit at a slower pace versus the last 12 months with increasing periods of volatility.
Thank you for listening, we look forward to speaking to you again next quarter.

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