Sanlam Hybrid Capital Bond Fund Five-Year Anniversary

02 September 2021
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Since launch five years ago, the Sanlam Hybrid Capital Bond Fund has delivered a total return of 42.1%, placing it at the top of the Investment Association’s (IA) Strategic Bond sector over the period.

  • Five-year total return of 42.1%

  • Ranked 1st out of 70 peer group funds that have 5-year performance data in the IA Sterling Strategic Bond sector, 200bps ahead of 2nd place in the sector

  • Zero defaults, distressed sales or exchanges

  • Low correlation to interest rates 

  • AAA 10/10 MSCI ESG Quality score

  • Peter Doherty, lead fund manager, rated A by Citywire
  • Alpha-Fund-Manager.png

Past performance is not a guide to future performance


HCB-Chart-1-V2.jpg

Performance data shown is that of the Sanlam Hybrid Capital Bond Fund, Class A GBP Acc. Performance is shown on a bid price basis, with net income reinvested, net of fees. Source: Morningstar and Link as at 31/08/2021

Lead fund manager Peter Doherty and fund manager Guillaume Desqueyroux have managed the fund together since inception. The investment process and style has remained consistent from day one with returns coming from research-led, bottom-up security level decisions to find and capture uncorrelated sources of alpha in a high-conviction portfolio. Risk and return are assessed under a “four pillars” framework to deliver superior risk-adjusted returns:

  • Total return capacity - “How much could this bond deliver over 12-24 months?”

  • New issues - Active engagement with the debt capital markets including “Reverse Inquiry”

  • Unrated bonds - First time and infrequent borrowers

  • Legacy bonds - Opportunities from changes to bank and insurance company regulatory frameworks

What have been the highlights of running the fund over the past five years?


The process of doing detailed work at the security level and investing in themes before they become more widely appreciated and popular (and re-priced upwards) is our key competitive advantage.

This approach delivers returns that are not driven by short-term market moves and provided that our analysis is sound, the returns will come in time.  This approach has worked from day one of the fund, which was started not long after the 2016 Brexit vote. Government bond yields had fallen quite dramatically after the vote and credit markets were somewhat stressed, particularly in UK-centric businesses. The opportunity was to take a two-to-three-year view and invest in Hybrid Capital issued by large, well-capitalised businesses where we understood the security level opportunities better than our competitors.  With pan-European operations already in place, it was obvious that Aviva, Legal and General and other leading UK financial services companies would weather Brexit and that their bonds had been oversold.

Similarly, in 2021, we are reaping the benefits specifically in “legacy paper” as European Banks retire various capital securities early to comply with new capital treatment rules coming into effect in January 2022. We know how this narrative will play out and are already positioned nicely.
 

In contrast, what have been the challenges of running the fund over the past five years?


Our approach is not always understood or popular with investors, who expect discussions on Central Banks, quantitative easing, inflation and the like along with interest rate forecasts.  We think that trying to invest on the basis of binary macro or political forecasts is incredibly difficult and only a very small number of people globally can do that. We are not one of them. The list of “surprises” – Greek crisis, Brexit, Trump, Covid-19 – make macro forecasting and trading impossible, so we don’t bother.

We spend our time finding value and building resilience and genuine diversification into the portfolio.
 

What about the next five years?


One lesson of the past five years is that investors should expect the unexpected. We have built a resilient return profile by emphasising a total return approach and complementing that with specific opportunities in the new issue market, unrated bonds and legacy paper, driven by changes in capital treatment in the banking and insurance sectors. The four pillars of our approach enable us to generate performance that is largely independent of whatever is happening near term in the bond markets.

Our fund is built with diversified return drivers and we believe investors will need that diversification over the next five years.
 

How does the team work?


The wider Sanlam Fixed Income team of five has a great balance of youth and experience and we work incredibly well together in an open collaborative process. Guillaume and I have worked together on fund since inception, and we believe that stability and consistency are important components of our success. Moving the team from Tideway to Sanlam Investments in April 2020 means we can benefit from a strong, stable parent whilst still keeping our boutique ethos intact.
 

How should investors think about the fund from here?


Global bond yields are at or close to all-time lows, which means there is limited protection against inflation or rising interest rates. For most wealth managers and institutions who need to allocate some money to bonds, at the very least that capital needs to keep its value in real terms after fees.

To beat inflation net of fees means that most government bonds and corporate bonds are un-investible. Traditional High Yield can work but this sector has defaults to contend with so the net returns can be lower than expected.

Hybrid Capital offers a similar headline yield to traditional High Yield but in our case as we have had no defaults, all of the expected return has been delivered. Whilst this cannot be guaranteed in the future, this is our mindset and starting point when selecting assets.

So, anyone who has invested in or allocates to high yield should consider our Fund on the basis that we offer better prospects than vanilla high yield on a default-adjusted basis. The following graph illustrates this point as the Sanlam Hybrid Capital Bond Fund offers a better return/risk profile than its sector and comparable BBG fixed income indices and sub-indices.

Hybrid.png
[1] 
 

The Fund has delivered 7.3% annualised over the last five years, which sounds like a lot for a bond fund. Have investors missed the boat?


We are starting from a very different place today than five years ago so we cannot expect to deliver the same total return over the next five years. However, the correct comparison should be made with the alternatives in government bond or investment grade corporate bonds. In these markets, yields are low and there is little to no protection against rising yields. If you want to achieve attractive total return from a portfolio of household name businesses, this is where Hybrid Capital can play a role. We’re picking up yield by investing lower down the capital structure as opposed to taking a large bet on duration.  
 

Why don’t more asset managers have hybrid funds?


It’s a specialist asset class requiring specialist knowledge and has its own ecosystem. We are embedded firmly within it and that is part of the reason why we’ve been successful. When a company is thinking of issuing a hybrid bond, they’ll often come to us to discuss pricing or the terms of the bond or other aspects of the issue. Because of our long-established relationships with issuers and brokers we often get good allocations in the primary market which not everyone is able to do as demand for the most attractive issues regularly outstrips supply. Our own proprietary research means we have a good handle on where pricing should be at any point in time, and we can execute buy or sell decisions in the fund very quickly.

Active managers are paid to do their homework and we certainly do that.
 

How could a Wealth Manager use the Fund?


The below quote has been supplied by a long-term professional investor in the fund.

“The Sanlam Hybrid Capital Bond Fund has been used within our model and DFM portfolios for a number of years and has proved to be a solid and consistent performer. Originally bought to provide an alternative to high yield bonds, we particularly liked the focus on financials, which provided the potential of additional returns, backed by exceptionally strong balance sheets. The under-researched nature of hybrid and unrated bonds offers the potential to deliver strong risk/reward characteristics, in conjunction with an experienced team who understand this market inside out.  The fund can be used as a diversifier within a wider fixed income allocation, or as a standalone component of a more adventurous portfolio.  In a world where fixed income returns are likely to be more challenged, we remain of the opinion that the fund continues to offer attractive attributes.” - Andy Parkes, Chief Investment Officer – Finance Shop Discretionary Portfolio Management

Further information on the fund is available here or get in touch with our sales team.


[1] Source: Bloomberg, except for Morningstar for the £ IA Strategic Bond, Sanlam Hybrid Capital Bond Fund’s sector, as at 31/8/2021. Morningstar does not share any Modified duration for the IA Sector. Graph above depicts data of the Sanlam Hybrid Capital Bond Fund, its sector and various Bloomberg fixed income indices and sub-indices. Details concerning relevance of the various indices: Global High Yield, $/£/€ Corporates: underlying assets have a similar scope to the investment universe of the Sanlam Hybrid Capital Bond Fund; All Government bonds: underlying assets represent the lowest-risk (or traditionally ‘risk free’) end of the Fixed Income market and therefore can be used as a baseline of comparison; Emerging Markets hard currency: underlying assets are not represented in the Sanlam Hybrid Capital Bond Fund as the fund is not active in emerging markets, however, this is graphed for representational purposes of what is achievable away from this product; BBG Global Aggregate: underlying assets represent the exhaustive debt investment universe.

Disclaimers

Marketing material for professional investors only. Past performance is not a guide to future performance.
Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital.
 
The views expressed in this document should not be taken as investment advice, forecast or a recommendation to invest in the Fund.
Please seek independent professional advice before making an investment decision as not all investments are suitable for all investors.
 
Fund Risks
 
The fund will invest in bonds and other debt instruments, this will be impacted by factors such as changes in interest rates and risk of default by the issuer. The Fund may engage in transactions in financial derivative instruments for hedging purposes. There is a risk that losses could be made on derivative positions or that the counterparties could fail to complete on transactions. The Fund may invest in Contingent Convertible Securities (CoCos). The value of CoCos is unpredictable and will be influenced by many factors, without limitation (i) the creditworthiness of the issuers; (ii) economic, financial and political events that affect the issuer; (iii) general market conditions and available liquidity. The investor may not receive a return of principal if expected on a call date or indeed at any date.


Peter Doherty
Head of Fixed Income

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