Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process and the make-up of the investment team?
The L&G Strategic Bond Fund aims to generate long-term capital growth and income by investing in fixed income markets. The fund is managed by Colin Reedie, Head of Active Strategies at LGIM and Matthew Rees, with the help of a six-member team specialising in credit, rates and inflation and risk management. We also lean on the expertise of the wider fixed income team to ensure that the fund has diversified sources of return and risk. This all-inclusive view, we believe, allows us to identify potential opportunities that others may overlook.
We invest across a wide spectrum of fixed income assets, e.g. government bonds, developed market investment-grade corporates, global high yield and emerging market debt and use derivatives to hedge exposure and enhance returns. Our core exposure is to corporate bonds, but we have a flexible approach to duration management and will seek to hedge out credit exposure should the team believe it needs to be defensively positioned.
A combination of macro, quantitative and qualitative inputs inform our investment views and shape our implementation. This is particularly important for us to understand where we are in the economic cycle given the impact that it has on interest rates and credit fundamentals. Our nimble, diversified and team-based investment approach has led to the L&G Strategic Bond fund to reach the first quartile of the IA Sterling Strategic Bond Fund on a one, three and five-year basis[1].
How are you positioning your portfolio?
Even though it appears the timing of a US and European recession has been pushed out until 2024, we still think there will be a downturn next year. Our view is that investors are not being paid sufficiently to increase credit risk, so we remain cautious in our outlook. Compared to the COVID-19 pandemic market lows of 2020, and even last year, we believe valuation opportunities are getting harder to find across most of the asset class. The exception to that rule may be China. While deflation, not inflation, is the main headwind here the extent of investor pessimism is potentially creating some interesting, if contrarian, opportunities, in our view.
Because, in our view, a recession will ultimately unfold next year, we have increased the duration of the portfolio on the basis that rates may be nearing their peak. This view has also driven our relatively defensive positioning on the credit side, with half of the fund being invested in developed market investment-grade debt.
Elsewhere, in terms of positioning, while we have some exposure to high-yield bonds and emerging market debt, we have reduced our overall weighting in these areas.
Can you identify a couple of key investment opportunities for your fund you are playing at the moment in the portfolio? This could be at a stock, sector or thematic level.
Within the developed market investment-grade corporates, we have increased our conviction in shorter-dated maturity European investment-grade issues where the overall yield has been boosted by the inversion of the government bond yield curve. Furthermore, we believe these securities provide more defensive characteristics in a potential risk-off scenario.
In US credit, we believe that the soft-landing narrative has been largely priced in, but some areas are still experiencing strong demand from investors looking to capture generous yields, such as in long-dated maturities and highly rated, non-cyclical corporate issues, in our view.
In government bonds, we are overweight UK Gilts versus German Bunds. We believe that the UK economy isn't as inherently more inflationary than financial markets are currently pricing in. Additionally, investor consensus appears to be overwhelmingly bearish on European economic growth (due partly to Europe's economic links with China) and we are willing to position against that.
