Video transcript
Speakers
- Victoria Bartlett – Senior PR Manager, Rathbones
- Stuart Chilvers – Fund Manager
Transcript
Victoria: Hello, I’m Victoria Bartlett, Senior PR Manager here at Rathbones. I’m delighted to be joined today by Stuart Chilvers, who heads up the Rathbone High Quality Bond Fund at Rathbones Asset Management. Stuart, great to have you here. Thanks for joining us. Can you start by introducing yourself and giving us an overview of the fund and what it sets out to achieve?
Stuart: Thanks, Victoria. I’m Stuart Chilvers, a Fund Manager within the Fixed Income team. I joined Rathbones in 2017 and took over lead management of the Rathbone High Quality Bond Fund in March 2023.
This is a defensive bond fund that takes limited credit and interest rate risk. At least 80% of the portfolio must have a credit rating of A- or above at all times, with no allowance for high-yield credit. The fund also keeps its duration short to help preserve capital.
The fund targets a return of the Bank of England base rate plus 0.5% per annum while seeking to limit drawdowns through its short duration and high credit quality. Capital preservation sits at the heart of the strategy.
Victoria: How does that focus on capital preservation shape your investment philosophy?
Stuart: Given the focus on capital preservation, the fund naturally has a short-duration and high-quality bias. This means the fund has lower sensitivity to moves in government bond yields and also tends to have lower sensitivity to spread widening given its weighting towards A-rated and above credit.
Given the nature of the fund, the starting point for any investment is always whether we are receiving sufficient compensation for the risk being taken.
We are also extremely focused on how a bond actually behaves. For instance, if a bond is rated A+ but trades with a credit spread beta more similar to a BBB credit and suffers from poor liquidity during periods of spread widening, it is likely to be inappropriate for the fund.
Finally, it’s worth noting that we do not seek to increase yield by taking liquidity risk. The strategy is designed to be highly liquid and, as such, we only invest in underlying bonds that are liquid.
Victoria: Take us inside your investment process. When you’re looking across the fixed income universe, how do you identify opportunities and how do they earn a place in the portfolio?
Stuart: Ideas and themes within the portfolio are generated from a blend of top-down and bottom-up views. The investment process is non-linear and does not always follow a set order.
For instance, an investment theme could stem from a macroeconomic view that then leads to credit analysis being undertaken on a specific group of companies. Equally, a credit analyst may identify strength or weakness within a sector, with an investment theme developing from there.
However, all investment opportunities pass through the same stages of the process. First, the idea is generated. It is then assessed through credit analysis using our four Cs model: character, capacity, covenants and collateral.
We then undertake valuation analysis to assess the relative attractiveness of the bond and risk analysis to understand how adding the investment would alter the characteristics of the portfolio.
For an idea to be included in the fund, we must be comfortable that we are being adequately compensated for the credit risk we are taking and that the position supports our overall investment view for the portfolio.
Victoria: You mentioned risk there. Once positions are in the portfolio, how do you manage that risk, monitor exposure and decide when to adjust allocations?
Stuart: Risk is monitored and managed on a daily basis. We use MSCI BarraOne and Bloomberg to monitor portfolio risks on an ongoing basis and to understand the risk profile of the fund from both an absolute and relative perspective.
Adjustments to allocations can be driven by a range of factors, including company-specific news flow that changes our conviction in the fundamentals, changes in our macroeconomic outlook or market movements that affect relative valuations.
Victoria: There’s a lot of choice out there for investors. What differentiates this particular strategy?
Stuart: When you look across the short-duration investment-grade fund universe, allocations to BBB-rated credit are often very high and, in some cases, supplemented with high-yield exposure.
However, if an investor is moving to shorter duration to become more defensive in their corporate bond allocation, taking on additional credit risk can partially offset that benefit.
As such, we would highlight the requirement for at least 80% of the portfolio to be invested in A-rated or above bonds, and in practice often much closer to 100%, as a key differentiator.
Victoria: Finally, what type of investor is the Rathbone High Quality Bond Fund designed for and where does it fit within a broader portfolio?
Stuart: Fundamentally, the fund is designed for investors who favour short duration and high-quality credit within their corporate bond exposure, rather than the higher level of credit risk often associated with short-duration corporate bond portfolios.
At its heart, the fund is a defensive and highly liquid allocation that can complement higher-risk areas of a portfolio.
For example, investors may use the fund when looking to increase the defensiveness of their corporate bond allocation from both a duration and credit risk perspective. Alternatively, it may appeal to investors seeking to move beyond cash-like products if they expect interest rate cuts and wish to benefit from the associated decline in yields.
