UK Aggregate Bond Fund


Fund overview

The Fund aims to achieve a combination of income and capital growth over the medium to long term from an actively managed portfolio comprising a broad range of fixed interest investments, and represents an effective way of accessing the full skills and experience of RLAM’s fixed interest team in a single investment vehicle.

The Fund predominantly comprises sterling investment grade credit and UK government bonds but may also comprise sub-investment grade bonds, unrated bonds, index linked bonds and overseas government bonds. The Fund may also invest in floating rate notes and money market securities, appropriate in house collective investment schemes and fixed income derivatives. 

Manager 

Richard Nelson joined RLAM from The Co-Operative Group when its life, pensions and asset management business was acquired by Royal London in 2013. Richard joined The Co-operative as a trainee actuary in 1994, before moving into Asset Management in 1997 where he helped run the cash and treasury function from 1999.  He has been managing gilts since 2000 and corporate bonds since 2005.  Richard qualified as an actuary in 2003 and holds a degree in Mathematics & Statistics from Exeter University. 

Investment approach

Management of the Fund follows RLAM’s well-established approach with respect to government and credit portfolio management. RLAM is a value investor and all investment decisions are based upon our assessment of value. Our bond portfolios are managed using a combination of top-down analysis based on our macroeconomic views combined with bottom-up security selection. We aim to construct portfolios that will deliver alpha from multiple sources as we move through the market and economic cycle.

At the macro level, a quarterly economic review, which covers all major economic regions, focuses upon key variables such as growth rates and inflation. Technical drivers, such as flows related to pension fund regulation, which have become a key driver of the level of gilt yields, are also considered. Our outlook scenarios, including rate forecasts, underpin our investment strategy. We look to invest where we believe the market has mispriced bonds from an economic or technical perspective. Duration positioning is determined by the strength of our conviction with respect to yield forecasts relative to consensus and the overall risk budget for the portfolio.

Asset allocation, between government bond and credit bond sectors, is undertaken by the Head of Fixed Income, supported by the Fixed Interest team.

From a bottom up perspective, we believe that the most important component of performance of credit portfolios will be security selection. Our key differentiation is our identification and exploitation of the inefficiencies presented by the credit market in relation to (1) the benchmark orientation of many managers, (2) the use of credit ratings as a key driver of security selection, (3) the inefficiency created by large scale managers having to focus on the most liquid issues and the subsequent lack of research on less high profile issues and, (4) the undervaluation of security. To help identify these inefficiencies, individual sectors are covered by both a credit analyst and a credit fund manager, providing fundamental credit evaluation and a valuation perspective, respectively.

Notably, our internal rating methodology looks not only at the probability of default (where credit ratings agencies place their focus) but also the protection offered to bondholders (covenants and security). For government bonds, selection is driven by our economic views and an assessment of value. To achieve this we use a proprietary government bond relative value model to highlight cheap and expensive bonds. The output from this model is reviewed daily and used alongside other regression based models to assist with the selection of individual bonds. In addition, we consider stock specific factors that are vitally important, such as the impact of changes to indices and potential issuance.

Risk management is an integral part of our investment process. In addition to the monitoring of the portfolio versus set exposure ranges, we use portfolio management and risk systems to regularly monitor the overall risk within the portfolio.

Product Risk Warning

Past performance is not a guide to future performance. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Unlike the income from a single fixed income security, the level of income (yield) from a fund is not fixed and may go up and down. For funds that use derivatives, their use may be beneficial, however, they also involve specific risks. Derivatives may alter the economic exposure of a fund over time, causing it to deviate from the performance of the broader market. This fund can invest more than 35% of its value in government securities.