Rachid Semaoune, co-manager of Royal London Global Bond Opportunities, gives Edmund Greaves the lowdown on the fund, which invest in bonds – debt issued by companies or governments. It’s also a Moneywise First 50 Fund for beginner investors
What is the Royal London Global Bond Opportunities fund?
The main objective of the Royal London Global Bond Opportunities fund is to generate a high level of income, around 5% to 6% a year, and to achieve some capital growth.
The fund is very unconstrained [unrestricted in what it can buy]. It is globally diversified and can invest in high-yield investment-grade bonds and in unrated bonds [company debt that has not had its risk level evaluated by an external ratings agency].
When the fund was launched in December 2015, we started with 60 to 65 holdings. We have around 180 now and we’re probably looking to settle around the 200 holdings mark.
WATCH: Moneywise editor Rachel Rickard Straus gets the lowdown on the fund from the manager.
How do you identify bonds to invest in?
We have an in-house investment process that has delivered strong performances for a variety of Royal London funds and strategies.
We believe that investors tend to overvalue liquidity [the ability to buy or sell a holding easily] and tend not to think about security within a bond and the ‘covenants’. Covenants are just a set of legal languages in the bond documentation that tell the company what they can and cannot do. We focus our investing process when we pick a bond on the security and the covenants.
We don’t mind illiquid bonds if we’re being paid to hold them [interest rates may be higher on illiquid bonds to compensate investors for the fact they may be harder to buy or sell]. This is one way of generating superior income.
What’s been your recent investment strategy?
With oil prices stabilising there have been great opportunities to invest, especially in European/Nordic energy. It’s a small sector, which tends to be more illiquid, but the bonds are secured on great assets.
A good example is a bond from a company called Jacktel. It is a dollar bond, just over $100 million. It’s illiquid and unrated. The bonds are secured on a platform located offshore, near Norway [if for some reason the company cannot repay its debts, lenders will receive proceeds from the sale of the platform].
The platform provides accommodation for the oil workers; it’s like a floating hotel. The platform is leased to Equinor, the Norwegian state-owned oil and gas company that used to be called Statoil. It’s a great company, 67% owned by the Norwegian state, and Equinor is a very creditworthy counterparty.
The investment is secured on the platform and it pays 10%.
The rate is high because it’s a very niche market, so it’s not open to many investors, and the bond is unrated. It’s not something that is on the radar of a lot of fund managers.
How often do you buy and sell bonds?
We tend to hold bonds for many years. We’re not traders. We are not trying to buy bonds and sell them on, making a two- or three-point profit.
If we think that a bond has value and offers great protection, or has great characteristics, we will hold it until something changes, either at a fundamental level or the pricing level.
Typically, less than 30% of the fund is changed each year.
What’s been your best investment decision?
General Electric (GE) has been a great investment. Its power business is not doing well. As a result, the company’s bond rating was recently downgraded from AAA to BBB+.
The company has more than $100 billion of bonds outstanding. The downgrade had a significant impact. A lot of investors and fund managers became forced buyers. [Some investors may have certain rules – for example, that they can only invest in debt of a certain rating, so are forced to sell if the rating on a holding falls.]
That triggered, at its worst, almost a 30% drop in the bond price. We analysed the company and decided that it had many ways to strengthen its balance sheet.
We bought these bonds at around 75p. The firm then announced the sale of some of its pharmaceutical business, which would raise around $21 billion, and that it would apply the proceeds to pay down debt. The bonds rallied sharply and are around 94p [at the time of writing].
And the worst?
My worst was a Lehman Brothers bond in 2008. I bought it because I believed that Lehman Brothers was too big to fail and that the US government would bail it out. Unfortunately, it decided to bail out Merrill Lynch because it was even bigger and let Lehman go bust.
At that time, government support for banks was kind of implicit. You’d have thought it inconceivable that the US would let Lehman Brothers file for bankruptcy.
That wasn’t such a good purchase.
What’s the first thing you personally invested in?
My home in London and a small flat in Marseille. I can see it every day. I’ve got that tangible security.
We have some bonds that are secured on properties. Property values go up and down but in the long run they’re still there.
What’s your top tip for a beginner investor?
I’ve been through many crises in my career: the Dotcom crisis, the financial crisis and the European crisis in 2011.
Don’t panic when markets are volatile. Don’t let that volatility change your strategy or drive your investment decisions. I think that is very important.
Royal London Global Bond Opportunities Key Stats:
Fund size: £105.66 million
Ongoing charge (OCF): 0.5%
Source: Morningstar, 7 March 2019
The manager behind the fund
Rachid Semaoune joined Royal London Asset Management in February 2015, from UBS Asset Management where he spent three years managing investment-grade credit portfolios. Prior to this, he was a deputy credit fund manager at Old Mutual (now Merian) Asset Management.
Rachid studied for a PhD in Physics at Imperial College London and also holds a postgraduate degree in laser physics from the Université Paris 13.
He co-manages the fund with Eric Holt.
|Four-year discrete performance of Royal London Global Bond Opportunities|
|Year||0-12 months||12-24 months||24-36 months||36-48 months||48-60 months|
|Royal London Global Bond Opportunities||3||7||12.7||-||-|
Index: IA Sterling Strategic Bond. Note: historic returns only available up to 36 months due to age of the fund. Source: FE Trustnet, 7 March 2019