In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they'd never buy.
This week our interviewee is is Craig Veysey, portfolio manager at Man GLG, where he runs the Bronze-rated Man GLG Strategic Bond fund.
Which Sector Shows the Biggest Promise in 2023?
After their annus horribilis in 2022, our view is that higher credit quality investment grade bonds provide an attractive opportunity for investors this year. They offer significantly more attractive yields than a year ago, an enhanced spread over government bonds that themselves have seen much increased yields and provide more adequate protection than lower quality credits. Should inflation and growth moderate as central banks’ aggressive interest rate hiking cycle nears its end – our core scenario for later this year – then the additional kicker of duration can provide a further boost to returns, as yields begin to price in a more benign environment for bond investment.
Within investment grade, it is important to differentiate however between sectors, regions and specific credit opportunities. More cyclical sectors may not perform as well as defensive areas of the market, as interest rate hikes push down on economic growth. Also, major central banks will not move at the same speeds, again providing opportunities to a more active bond investor.
What's the Biggest Economic Risk Today?
Without a doubt, for a bond investor it must be inflation. Unless you are investing in inflation-linked securities, bonds have fixed coupons and redemption proceeds that have lowered real returns in an inflationary environment.
As we saw in 2022, central banks can also push up short term rates significantly while inflation is not under control, again exerting downward pressure on bond returns. In the near term, inflation is likely to still be at elevated levels which can cause unwelcome second round effects through wage demands. Higher short-term rates are inevitable near term to further squeeze growth and employment, and this in itself can cause volatility in bond markets.
Eventually a harder economic downturn is more inevitable as a result, however, accompanied by disinflation. This could be a great environment for government bonds and higher quality investment grade bonds. Timing is everything though, and patience may be required of bond investors in the coming months.
Describe Your Investment Strategy
My investment strategy is an active global fixed income strategy that invests in global government and corporate bonds, with the aim of producing attractive returns for investors with a medium to long-term investment horizon.
In corporate bonds, we are mainly focused on attractively valued investment grade bonds, particularly rising stars and fallen angels with recovery potential, that have strong identifiable idiosyncratic catalysts for realising potential capital gains. A key differentiating part of the investment process of the Strategic Bond Fund is to also actively manage duration, FX and credit hedging (Tactical positioning) to provide upside capture versus broad fixed income indices, while reducing downside capture, allowing for more stable returns in different yield environments
Which Investor Do You Admire?
Howard Marks, the high yield bond investor. He is a common-sense investor who has written several thought-provoking investment books that discuss the importance of market cycles, avoiding losses through investing in undervalued securities, as well as eschewing groupthink.
Name Your Favourite Type of Bond
Ideally a good bond investment will have a reasonably high coupon, be of superior credit quality, and be somewhat undervalued due to market, economic or business circumstances that can be subject to change. With careful due diligence we aim to identify an idiosyncratic catalyst for returning the bond to fair value and providing an uncorrelated potential capital gain in addition to the income stream, to our investment.
What Would You Never Invest In?
A deteriorating credit situation, where the company’s bonds may provide a very uncertain projected return due to the heightened risk of principal or coupon loss. As a bond investor, I am not aiming for equity type returns, and therefore should not be willing to absorb equity type losses on any bond investment.
Investment Grade or High Yield?
Within investment grade, however, we particularly focus on opportunities that straddle the investment grade and high yield sector, in the form of so-called rising stars and fallen angels. There are often very exciting opportunities to invest in higher credit quality bonds that are subject to a potential turnaround due to any one of several significant identifiable catalysts, after bond weakness.
House or Pension?
I’d suggest a pension as a better investment option. This is down to the flexibility to invest in different asset classes according to their valuations and dependent on where in the economic and market cycle we might be in at any point in time. Also, there is often considerable support in the form of tax relief from the government, as well as company contributions to further assist in building a long-term retirement plan.
Crypto: Brilliant or Bad?
Crypto is hard, if not impossible to value as it has no income stream. In my view it is a volatile and speculative thing that relies on the belief than others will be willing to pay more than you at some point in the future. It also very bad for the environment.
What Can be Done to Improve Diversity in Fund Management?
We can make fund management a more desirable career option by better explaining to young people in schools and colleges the benefits of a career in the industry – the intellectual stimulation, the satisfaction of working alongside clients to try and solve their most complex investment problems, and the enjoyment that comes from being in an interesting and collaborative place like Man Group.
Have you Ever Engaged with a Company and Been Particularly Proud (or Disappointed) in the Outcome?
We often engage with companies, particularly in the area of ESG, and where we ask good questions we’re usually very pleased with how forthcoming a company is with information and its willingness to embrace positive change.
What’s the Best Advice You’ve Ever Been Given?
I’ve had lots of very good advice from some very perceptive people over a long career. Probably the best is the most simply, however: ‘Try to always get a good night’s sleep.’ It’s usually much easier to make good decisions with a clear head and fresh eyes.
What Would You be if You Weren’t a Fund Manager?
Probably an analyst of some description. But outside financial markets, probably an entrepreneur – building a business has always appealed to me.
