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INTERVIEW: Talking Fixed Income With UK's Stratton Street

Tom Burroughes

15 August 2012

Editor’s note: The UK-based investment house with a total of over $1 billion of assets under management, Stratton Street, explains its approach in overseeing the Wealthy Nations Bond Fund.

Who is/are the manager/s of the fund?

The fixed income groups investment process and philosophy has been built over time by the collaboration of Andy Seaman and Mark Johns, who have worked together since the mid 1990s. Day-to-day fund management is supplemented with input from Freddie Coldham and Parita Ghalay. Andy and Mark have been with Stratton Street Capital since its formation in June 2005. This was the successor to MSG & Partners Ltd, which received its initial approval from IMRO in May 2001.

How old is the fund? Its size of AuM, target returns, fees?

Current fixed income assets under management and advice total $1.15 billion. The largest fund, the New Capital Wealthy Nations Bond Fund, where they act as the advisor, has $850 million in its portfolio. Launched in September 2009, its current portfolio gives a gross yield of over 5.5 per cent and has achieved a compound gross return of 10.23 per cent. Total fees including expenses are approximately 1.33 per cent making a net return of 8.90 per cent.

What is the fund's broad mandate and operating philosophy?

The overall investment process focus is on investing in a portfolio of bonds issued by creditor nations with investment grade ratings but also, by separate review, have a strong ability to repay their debt. The assessment of a country’s net foreign assets is an essential component in the investment decision. NFAs may be defined as the value of the assets owned abroad minus any debt owed to foreigners. Effectively, the NFA position seeks to calculate whether a country's indebtedness and/or its exposure to currency risk in its debt, implies a potential instability going forward.

Why was the fund set up? 

The fund was set up in response to client interest in the managers’ investment process and record built up in its Renminbi Bond Fund but in a UCITS form and without the currency exposure to the renminbi.

What sort of clients invest in it? 

The fund has a very wide diversified client base principally made up of wealth managers from all over Europe but principally the UK and Switzerland.

Who and where are Stratton Street, the firm?

Stratton Street Capital was based in Stratton Street off Piccadilly on its formation in 2005. Owing to the development of the business and increase in head count, we have moved away from the street but kept our business roots in our title. The partnership’s activities are split into three areas of investment focus of which the largest is international bond and currency investment.

What sort of views do the managers of the fund have about the asset class they are involved in? 

The managers believe that we continue to be going through a period of deleveraging in the world financial markets. During such a period, capital flows back from the debtor nations to the creditor nations. Therefore it is imperative as part of the investment process to look at the ability to repay its debt not only on its own behalf but also to protect the interests of its citizens and corporations. Currently with the slowdown in the world economy as a result of this deleveraging the managers prefer the protection of higher grade bonds over high yield.

How has the eurozone crisis and the problems of indebted Western countries affected the thinking of the fund?

The fund’s investment process was key in identifying the risks inherent in about a dozen countries whose NFA positions were greater than 100 per cent, which has meant that it has not been directly affected by the problems of the debt crisis. It correctly identified 11 countries in Europe, all of which have come under pressure over the period.  It is this ability to avoid the problems which has led to the success of the performance of the portfolios managed by the team against its peer group.

Does the fund have a limited shelf-life or is it open ended? Is it quoted on a stock market?

New Capital Wealthy Nations Bond Fund is an Irish based UCITS structure listed on the Irish Stock Exchange and recognised by the FSA. It is an open ended daily dealing fund.

Are there other broad points you would like to make about the fund?

It is value-driven, looking to maximise returns through a widely diversified portfolio, currently with 76 holdings. It only buys into large issues with a minimum of $500 million outstanding. The period of deleveraging in the world is going to take longer than most begin to anticipate. The 34 countries of the world that have relatively strong balance sheets are nations that are building themselves and are therefore more likely to want to look at developing their infrastructure rather than sustaining other people’s debt load.