Investors certainly weren’t prepared for the gilt rally this year, judging by fund flows. Assets under management in Citywire’s gilt sector have dropped from £5.6 billion a year ago to £4.9 billion now.
Those selling out have missed the turnaround in the sector’s performance. Over the past three months it tops its parent Sterling Bond category, returning 4.4% compared with 1.6% from the far larger Strategic Bond grouping.
Yet if fund buyers failed to anticipate the rally, so too did most fund managers in the sector. Over the past year just four can boast positive risk-adjusted returns, versus 13 who did not add value over the benchmark.
The star quartet are those clustered in the top-right corner of the chart below, plus Tom Sartain of Schroders who does not have a seven-year record in this sector.
Their top-right position signifies that they have outperformed on both one and seven-year views, meaning that they have successfully navigated conditions from the gilt bull market of 2008 through last year’s bear market to the present resurgence.
Perhaps the most telling aspect of their performance is that each of the trio runs two strategies in the sector: one long duration, and one shorter duration. Those whose risk-adjusted numbers are less favourable all tend to labour under broader gilt mandates.
This matters because Citywire’s Discovery system calculates information ratios for managers, not just funds, aggregating their performance across all their strategies within a sector.
In an investment universe where traditional fixed income calls like credit quality are less relevant, working to a defined duration benchmark has evidently proved beneficial in risk-adjusted terms. In general, managers making duration bets against wider benchmarks have fared less well.
Within their portfolios, though, the top three managers have nonetheless been willing to make substantial off-index allocations.
Insight’s Wickham has implemented positions in emerging market debt and short duration Bunds on his £297 million UK Government All Maturities Bond fund.
Amey of Pimco has made Slovenian sovereign debt a top-10 holding in his £25 million UK Sterling Long Average Duration fund, and for his £113 million UK Low Duration fund he has bought both high-yield credit and emerging market paper.