Last Word
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strategy directly from the fund managers themselves.
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research and market views together with an explanation of the
Over one, three, five and 10 years, the Baillie Gifford Strategic Bond Fund has performed in the top quartile for returns but sits in the lowest quartile for cost.
Axis analyses the fund from four perspectives to bring you insight,
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Review By Nicola Brittain
COMPANY_ Last Word
The Baillie Gifford Strategic Bond Fund approaches the market in several strategic ways. It allocates globally, between high-yield and investment grade bonds, as well as between government futures and corporate bonds at different points in the cycle.
Scroll down to read more...
“The Baillie Gifford Strategic Bond Fund has changed in name only - it has used the same strategic methodology since 1999.”
JOB TITLE_ Investment Writer
YEARS IN INDUSTRY_ 17
LOCATION_ London
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NICOLA BRITTAIN
Experienced team deliver excellent value for money
COMPANY_ Square Mile Investment
To view Square Mile Investment Consulting and Research Ltd's disclosure on their involvement on this site, please click here.
JOB TITLE_ Investment research analyst
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“We like the fund’s process – it is clearly defined and has remained consistent over multiple investment periods.”
The Baillie Gifford Strategic Bond fund provides investors with the Baillie Gifford Credit Department’s best corporate debt ideas globally. The fund can invest in both investment grade and sub-investment grade bonds, the relative sizing of these two asset types is the result of bottom-up bond picking rather than an asset-allocation decision. The fund is therefore a relatively straightforward corporate bond fund where derivatives are used to hedge currency risk.
Scroll down to read more...
YEARS IN INDUSTRY_ 6
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PAUL ANGELL_
PAUL ANGELL
Last Word
Perspective
Although the Baillie Gifford Corporate Bond Fund recently changed its name to the Baillie Gifford Strategic Bond Fund, the team has not changed the way it manages the vehicle. The fund has always had a strategic approach but was set up in 1999 before this was commonplace – its name was more in keeping with the times. The change was focus grouped with clients, and fund manager Torcail Stewart describes it as the product’s Marathon to Snickers moment, “it’s a different name with the same great formula,” he joked.
The fund operates in several strategic ways, most notably using asset allocation levers to manage the economic cycle. First it allocates between high-yield and investment-grade bonds, with reference but not strict adherence to a blended benchmark split of 70% investment grade and 30% high yield. In good times, it increases holdings of high yield, but when the market is less buoyant it opts for less risky investment-grade bonds.
Investment-grade bonds are generally rated AAA to BBB, while high-yield bonds tend to have credit ratings of BB through to D. Baillie Gifford believes the most attractive investment opportunities are found between these two extremes, specifically companies rated BBB and BB.
In retail, for example, the fund managers like Sally Beauty. The company caters to commercial hairdressers and although most bricks and mortar retailers are being hammered by online competitors, Sally Beauty is still growing. Amazon and other online retailers struggle to compete because they can’t promise immediacy of delivery and stocking the range of colours of beauty products required is problematic.
Although financials are out of favour with lower ratings than they once had, they now have more favourable valuations and stronger balance sheets. The bond fund holds Bank of America and Citigroup. Unrated companies are also of interest to Baillie Gifford. An example is the Pension Insurance Company, in which it holds a 3.6% position. Although Baillie Gifford lent to the company before it was rated, a recent rating saw its price increase considerably. The fund managers look for the same qualities in each company they lend to – resilience, a strong balance sheet, and an awareness of broader trends and changes in the market.
That the fund performs well but is reasonably priced compared with its peers may be of interest to cost-conscious investors. It has been quartile one over one, three, five and ten years, and is in the bottom quartile in terms of fees over the same time periods.
Baillie Gifford Strategic Bond Fund retains proven strategy
AUTHOR_ NICOLA BRITTAIN
The fund also actively allocates between government futures and corporate bonds at different stages of the cycle. The fund currently has a minimal portion of net duration coming from government futures, but during more volatile markets they have been as high as 25%.
Another key differentiator, is that the fund is global in outlook, casts the net wide in terms of corporate debt, and considers a diverse range of sectors. The fund has become more international with time, and at the time of writing, dollar issuers comprise 10% of the portfolio. However, the fund always hedges back to sterling to avoid currency risk.
The team adopts the traditional Baillie Gifford bottom-up approach to bond selection often taking large positions of 2-3% in the best ideas. This stock-specific approach means it often takes a contrarian attitude to out-of-favour sectors, such as retail and finance.
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Kames Global Diversified Income Fund
Fund
Vincent McEntegart has been managing the Kames Global Diversified Income Fund for six years and is well-versed to the changeable financial climate. Curabitur blandit tempus porttitor. Aenean lacinia bibendum nulla sed consectetur.
Manager
Vincent McEntegart
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As is often the Baillie Gifford way, the fund is priced extremely competitively. The ongoing charge figure on the fund is just 52 basis points compared with a sector average of 71 basis points. In our opinion, this represents excellent value for money. Corporate bonds require a high level of analysis and due diligence and the fact that Baillie Gifford provide this, with access to such a strong team of credit analysts, should be very attractive to investors in our view.
We welcome the fund’s name change and we also welcome the appointment of new co-manager of the fund Lesley Dunn on the 10th of January. Ms Dunn has over 15 years’ investment experience and brings a sub-investment grade expertise that complements Torcail Stewart’s investment grade and high-yield bond background. While we do believe that the impending retirement of Stephen Rodger, Head of Credit at Baillie Gifford will be a loss to the firm and the fund, we believe the exit has been well managed, not least by Ms Dunn’s promotion to co-manager on the fund. We also believe the name change from the Baillie Gifford Corporate Bond Fund to the Baillie Gifford Strategic Bond Fund better reflects the manager’s investment grade / sub investment grade opportunity set. The ‘Strategic Bond’ title should prevent investors wrongly regarding the fund as an investment grade corporate bond fund.
AUTHOR_ PAUL ANGELL
"We like this Strategic bond fund, its management team, long-term investment style and bottom-up bond selection across investment grade and sub-investment bonds.
Performance on the fund has been good, with the fund successfully outperforming its composite benchmark (70% sterling investment grade, 30% European high yield) over rolling 3-year periods.
Lesley Dunn was appointed co-manager on the fund earlier this year. Ms Dunn is an experienced investor with over 15 years’ experience, and we welcome her promotion, particularly given previous co-manager Stephen Rodger's retirement from the industry."
Unlike many strategic bond funds, the managers are moderate in their use of derivatives to alter the interest rate risk (duration) of the fund. We welcome such an approach since we believe it allows the managers to focus on their core competencies - credit selection and portfolio construction. The managers will however use derivatives to hedge out all currency risks in the fund. Again, we believe this process suits the managers, as it allows them to select corporate bonds from a global investment universe without taking currency risk which can often dominate returns in unhedged bond funds.
The fund’s performance has been impressive. Against a backdrop of bond-market exuberance, the managers have done well to outperform the funds composite benchmark over rolling 5 year periods, net of fees. We believe that given the quality of credit analysis undertaken by the team the fund should continue to outperform its index in the years to come regardless of prevailing market conditions.
We like the managers of the Baillie Gifford Strategic Bond fund as well as the wider credit team that undertake credit selection for the fund. To run a successful corporate bond fund that relies on bottom-up bond selection, the strength and depth of an analyst team is key, and we believe that the analysts in the team provide just that, with their healthy mix of backgrounds and time spent within the investment industry. Most importantly the team has successfully shown a knack for selecting undervalued bonds with attractive return expectations over a good period of time.
We also like the fund’s process – it is clearly defined and has remained consistent over multiple investment periods. Bonds are selected based on either yield generation or price-return characteristics, we view this as a useful way of segmenting different bond types. For the ‘price return’ holdings, the team look for bonds with an identifiable catalyst that has been missed by the wider market but should then generate additional returns for the fund. This has been a successful driver of performance for the fund over time and we believe that the successful identification of such catalysts helps to differentiate the fund from many of its competitors in this sector.
Team has knack for selecting undervalued bonds with attractive return expectations
Victoria Hasler, Head of Research, Square Mile Investment Consulting and Research Limited
Square Mile
Perspective
Fund buyers' perspective
Four fund buyers give us their insight into the fixed-income market and the importance of taking a strategic approach
Market Reaction
Next
Jonathan Woo_ investment research_ Santander Asset Management
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“There has been considerable structural reform in giant markets like India, China and the Pacific Tiger economies. It’s a time of change from investment in infrastructure to innovation. Baillie Gifford looks for superior growth, meaning its style is suited to this change. They make some debatable valuations but are valiant investors and can spot businesses with great fundamentals early. They are picking the sort of businesses that have the potential to steam ahead and accrue multiple years of earnings growth for investors.”
Scott Spencer_ Investment Manager_ F&C Multi-manager solutions, BMO Global Asset Management
“The key rationale behind Income Maximiser is the delivery of a 7% yield. The use of derivatives in the portfolio means the upside is therefore limited but we find the fund is a lower beta way of getting equity exposure as well as some downside protection.”
“The fund managers of Schroder Income [Nick Kirrage and Kevin Murphy] pick the stocks, and the derivatives for Income Maximiser are then written accordingly. We like the fact that derivatives provide a diversification element and we have a great deal of confidence that the derivatives are run by a separate team. It is a very different skill set and is a USP of theirs.”
Richard Philbin_ CIO_ Wellian Investment Solutions
Mona Shah_ head of collectives_ Rathbones
“After years of lacklustre performance, Asia and the emerging world experienced a resurgence last year, driven by rising commodity prices and a fundamental shift in favour of more cyclical sectors like financials, energy and materials. But many of the fortunes of Asia and emerging markets are driven by sentiment from the West, which was negatively affected by the US election in November. While markets have regained their initial losses, we’ve had no more clarity on what Donald Trump’s policies will mean with regards to global trade and protectionism. For this reason, we believe that diversification should offer benefits in a period where markets are likely to be volatile. In addition, the economies in Asia-Pacific are showing increasing dependence on domestic demand, and we believe funds exposed to growing demand from consumers in China, for example, may be better placed to withstand headwinds from the US.”
Robert Shepherd_ Director_ Bright & Co.
We were on the lookout for something different and, let’s face it, 4% or lower is the norm in this environment. So this is attractive”
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Achievable, sustainable, reliable
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Fund
Manager
Perspective
Fund Buyer
Perspective
This demo version has been optimised for desktop, laptop and tablet. Smartphones, iPhones will be supported in the next version.
to bring you insight, research and market views
together with an explanation of the strategy
directly from the fund managers themselves.
Axis analyses the fund from four perspectives
Review By Nicola Brittain
In retail, for example, the fund managers like Sally Beauty. The company caters to commercial hairdressers and although most bricks and mortar retailers are being hammered by online competitors, Sally Beauty is still growing. Amazon and other online retailers struggle to compete because they can’t promise immediacy of delivery and stocking the range of colours of beauty products required is problematic.
Although financials are out of favour with lower ratings than they once had, they now have more favourable valuations and stronger balance sheets. The bond fund holds Bank of America and Citigroup. Unrated companies are also of interest to Baillie Gifford. An example is the Pension Insurance Company, in which it holds a 3.6% position. Although Baillie Gifford lent to the company before it was rated, a recent rating saw its price increase considerably. The fund managers look for the same qualities in each company they lend to – resilience, a strong balance sheet, and an awareness of broader trends and changes in the market.
That the fund performs well but is reasonably priced compared with its peers may be of interest to cost-conscious investors. It has been quartile one over one, three, five and ten years, and is in the bottom quartile in terms of fees over the same time periods.
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Co-fund manager Lesley Dunn joined Baillie Gifford from Aberdeen Asset Management in 2016. She was promoted to co-fund manager of the Strategic Bond Fund in January 2018. She graduated from Strathclyde University with a BSc (Hons) in Maths, Statistics & Economics in 2000.
Co-fund manager
Torcail Stewart
Lesley Dunn
Co-fund manager Torcail Stewart joined the firm in 2008 and is a member of the credit team, responsible for energy, financial services, and insurance sectors. Stewart graduated from Cambridge in 2002 and received an MPhil in Management, Economics, and International Relations from St. Andrews University in 2005.
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Scroll down to see what Square Mile has to say...
The Baillie Gifford Strategic Bond fund provides investors with the Baillie Gifford Credit Department’s best corporate debt ideas globally. The fund can invest in both investment grade and sub-investment grade bonds, the relative sizing of these two asset types is the result of bottom-up bond picking rather than an asset-allocation decision. The fund is therefore a relatively straightforward corporate bond fund where derivatives are used to hedge currency risk.Scroll down to read more...
Unlike many strategic bond funds, the managers are moderate in their use of derivatives to alter the interest rate risk (duration) of the fund. We welcome such an approach since we believe it allows the managers to focus on their core competencies - credit selection and portfolio construction. The managers will however use derivatives to hedge out all currency risks in the fund. Again, we believe this process suits the managers, as it allows them to select corporate bonds from a global investment universe without taking currency risk which can often dominate returns in unhedged bond funds.
The fund’s performance has been impressive. Against a backdrop of bond-market exuberance, the managers have done well to outperform the funds composite benchmark over rolling 5 year periods, net of fees. We believe that given the quality of credit analysis undertaken by the team the fund should continue to outperform its index in the years to come regardless of prevailing market conditions.
Victoria Hasler, Head of Research,
Square Mile Investment Consulting and Research Limited
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Fund Manager’s own investment strategy.
Axis interrogates the fund from four perspectives
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The Baillie Gifford Strategic Bond Fund approaches the market in several strategic ways. It allocates globally, between high-yield and investment grade bonds, as well as between government futures and corporate bonds at different points in the cycle.
Review By Nicola Brittain at Last Word
Click for sound
from St. Andrews University in 2005. Co-fund manager Lesley Dunn joined Baillie Gifford from Aberdeen Asset Management in 2016. She was promoted to co-fund manager of the Strategic Bond Fund in January 2018. She graduated from Strathclyde University with a BSc (Hons) in Maths, Statistics & Economics in 2000.
Co-fund manager Torcail Stewart joined the firm in 2008 and is a member of the credit team, responsible for energy, financial services, and insurance sectors. Stewart graduated from Cambridge in 2002 and received an MPhil in Management, Economics, and International Relations
The Baillie Gifford Strategic Bond fund provides investors with the Baillie Gifford Credit Department’s best corporate debt ideas globally. The fund can invest in both investment grade and sub-investment grade bonds, the relative sizing of these two asset types is the result of bottom-up bond picking rather than an asset-allocation decision. The fund is therefore a relatively straightforward corporate bond fund where derivatives are used to hedge currency risk. Disclaimer »
“In terms of our fixed income outlook, we hold a slightly negative view on government bonds, while neither investment grade nor high yield offer an attractive return. There are opportunities, but each come with specific concerns. For instance, US government bonds with a 5-year maturity yield of around 2.8% seem attractive but the costs of hedging US dollars back to sterling erases more than half of that return. Much of our bond exposure is through strategic bond funds.”
Sophie Kennedy_ CFA head of research_ EQ Investors
Darren Ruane_ Head of Fixed Interest_ Investec Wealth & Investment Limited
"One challenge with investing in the global fixed interest sector is knowing exactly what you want to achieve from it. For some investors, it entails investments in multi-currency government (conventional and index-linked) bonds only. For others, it includes investments in various fixed interest sub-sectors such as investment grade and high yield bonds that change through the cycle."
Tim Sharp_ Managing Director_ Hottinger Investment Management
“Strategic bond funds have been very popular since QE, as the practice means that government bonds no longer fulfil their traditional role in the multi-asset portfolio. The negative yields attached to swathes of developed market government bonds leave many investors displaced, looking for income in assets that they would not normally choose, often moving further along the risk scale in the process. For multi-asset investors with an allocation to fixed income the strategic bond fund sector looks interesting because investors have the ability, in theory, to invest in a part of the fixed income space that suits them – they might choose to short, take direct credit or buy neutral duration exposure for example.”
Andrew Birt_ Head of Research_ Saunderson House
“We don’t currently recommend the Baillie Gifford Strategic Bond Fund, in part because of its old name which we considered confusing, given it can hold up to 50% of its assets in high-yield bonds. However, the name change addresses this. I like the managers’ emphasis on high conviction, long-term investing. It’s a real back-to-basics approach of lending to businesses based on the team’s belief in thier ability to pay the coupons over the life of the bond and repay the capital at maturity. The work they do on each company they lend to gives them comfort that it will make money for their investors over the long run.”
Baillie Gifford
Strategic
Bond Fund
and market views together
Axis analyses the fund
strategy directly from the
from four perspectives to
bring you insight, research
fund managers themselves.
with an explanation of the
Review By Nicola Brittain
at Last Word
Click for sound
Co-fund manager Torcail Stewart joined the firm in 2008 and is a member of the credit team, responsible for energy, financial services, and insurance sectors. Stewart graduated from Cambridge in 2002 and received an MPhil in Management, Economics, and International Relations from St. Andrews University in 2005. Co-fund manager Lesley Dunn joined Baillie Gifford from Aberdeen Asset Management in 2016. She was promoted to co-fund manager of the Strategic Bond Fund in January 2018. She graduated from Strathclyde University with a BSc (Hons) in Maths, Statistics & Economics in 2000.
"We like this Strategic bond fund, its management team, long-term investment style and bottom-up bond selection across investment grade and sub-investment bonds. Performance on the fund has been good, with the fund successfully outperforming its composite benchmark (70% sterling investment grade, 30% European high yield) over rolling 3-year periods. Lesley Dunn was appointed co-manager on the fund earlier this year. Ms Dunn is an experienced investor with over 15 years’ experience, and we welcome her promotion, particularly given previous co-manager Stephen Rodger's retirement from the industry"
Darren Ruane_ Head of Fixed Interest_ Investec Wealth & Investment Limited
Tim Sharp, Managing Director Hottinger Investment Management
"We don’t currently recommend the Baillie Gifford Strategic Bond Fund, in part because of its old name which we considered confusing, given it can hold up to 50% of its assets in high-yield bonds. However, the name change addresses this. I like the managers’ emphasis on high conviction, long-term investing. It’s a real back-to-basics approach of lending to businesses based on the team’s belief in thier ability to pay the coupons over the life of the bond and repay the capital at maturity. The work they do on each company they lend to gives them comfort that it will make money for their investors over the long run."
“The Baillie Gifford Strategic Bond Fund has changed in name only - it has used the same strategic methodology since 1999. ”
Scroll down to see what the Fund Managers have to say...
Scroll down to see what the Fund Buyers have to say...
Fund size_
Data correct as of 30/04/2018
Baillie Gifford Strategic Bond Fund
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“One challenge with investing in the global fixed interest sector is knowing exactly what you want to achieve from it. For some investors, it entails investments in multi-currency government (conventional and index-linked) bonds only. For others, it includes investments in various fixed interest sub-sectors such as investment grade and high yield bonds that change through the cycle.”
Andrew Birt_ Head of Research_
Saunderson House
Sophie Kennedy_ CFA head of research_ EQ Investors
Date: 24.05.2018
Baillie Gifford Strategic Bond Fund: Cumulative performance vs. the sector
Source: FE Analytics
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30
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25
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Baillie Gifford Strategic Bond Fund:
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Date: 24/05/2018
Baillie Gifford Strategic Bond Fund: OCF of IA sterling strategic bond sector
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