Video ID:
9049
Job Number:
7206
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Description:
Christine Johnson & Leo Schulz discuss the Old Mutual Monthly Income Bond Fund.
Bookmarks:
0|Old Mutual Monthly Income Bond Fund
76|Total return
128|Ideas for generating income
210|FMG
286|Interest cover
348|Virgin media
467|Outcomes
504|Strong return for small risk
552|2012 outcome
Duration:
00:10:47
Recorded Date:
14 March 2013
Video Image:
Transcript:
Presenter: My name is Leo Schulz. I have with me today Christine Johnson manager of the Old Mutual Monthly Income Bond Fund. Christine, you’ve been managing the fund for about two and a half years, but it’s recently changed its name, why is that?
Christine Johnson: Well the way to think about it is it’s the same fund, the same team and the same strategy. But because income’s always been quite a large component of the returns of the portfolio we thought we’d make that more explicit, so it’s got a new name.
Presenter: Okay. Now if we can just bring this slide full screen, these are the three core objectives of the fund, could you just talk us through these briefly?
Christine Johnson: Well, I said first of all income, and when we’re talking about income we’re talking about matching or beating the income of the top quartile of the peer group. Next up capital preservation, what we think of as respects for client’s capital. It’s the capital in the fund that drives and fuels the income generation, so that’s our next consideration. And finally there’s a total return focus, we’ve still kept that, it’s still in the strategic bond peer group. So when we’re thinking of total returns we’re aiming to be in the top half of the peer group over the medium term.
Presenter: And it is really important, that total return is important isn’t it, because you need to preserve capital in order to secure people a long term income don’t you?
Christine Johnson: Absolutely.
Presenter: Now, we talk about preserving capital, and I know that you’ve got some very interesting ideas for generating income, and we’re going to have a look at that in a moment, but in terms of the total return, both income and preserving capital, could you just give us a little speed guide as it were to some of the types of assets in which you would be expecting to invest in this fund?
Christine Johnson: Yeah of course. I mean it still manages the strategic fund and we still have a total return focus, so we’re prepared to invest right across the spectrum in terms of fixed income. And that means we can buy government bonds, either for total return or for protection, we’re happy to buy investment grade credit, high yield credit and as well as that we use interest rate futures and credit derivatives to help smooth the returns over time.
Presenter: Okay. Let’s just look at some of your ideas for generating income, and Center Parcs, not necessarily a name that people would be expecting to come up at this point in the conversation, but a 7.5% yield, so a very good yield relative to UK inflation, what’s the story here?
Christine Johnson: Well if we’ve noticed anything so far in 2013 it’s yet another tumble in the value of sterling. So, if anything, we’re going to have people staycationing back in the UK once again. Center Parcs is really well positioned to take advantage of that. And actually if you look at its occupancy rates over the last seven years they’ve been at an amazingly high and stable 94 to 96%, and if you think of the time period that includes, it’s the good times back in 2006 and the really dark days of 2008. But for a company like Center Parcs it’s not just about filling the chalets. That’s the number one criteria, but it’s also the idea that when you visit Center Parcs you’re a captive audience. You have to drink in their bars, eat in their restaurants and you have to pay for their activities.
and by doing all of this and increasing the discretionary spend of people who are there they’ve actually managed to put nearly 10% on their margins jumping up from 36% to 45%.
Presenter: So a strong profit margin there and a really good value proposition for people wanting a holiday at home. If we start to look now at FMG, now you can hardly get further away from Center Parcs, mostly based in Western Australia, a mining company, 6%, still paying a very good yield relative to UK inflation, and what’s the story behind this, Christine?
Christine Johnson: Well in our investment strategies we’re not just restricted thinking about the UK; all our ideas actually start out in the big global picture. One of those big global drivers at the moment is this rise and rise, this continuing strong growth of China, and FMG speaks exactly to that. They are the world’s fourth largest iron ore producer; they have a 16 billion Aussie dollar market cap; this is a big grown up business that we’re talking about. And the nice thing for us is they own the mines, they own the railroads, they own the towns, they own the ports; they are basically digging up Australia, putting it on a ship and sending it to China.
So while we can continue to identify that growth in China story something like FMG is a great way of getting exposure to it and also it gives you options away from perhaps the more difficult weak economies of Europe and the difficult stories in the UK at the moment.
Presenter: And interesting too the diversification that you’re able to get into the portfolio with something like this relative to something like Center Parcs. Christine, an ability for a company to pay its interest, to pay the coupons on its bonds, this is something which is really quite vital for a bond investor. I just wonder if you could tell us a little about in respect of FMG what you would call the interest cover.
Christine Johnson: Absolutely. I mean first and foremost in fixed income investing you need to make sure you’re going to get your page of coupon and you’re going to get your money back. So a company like FMG has something called four times interest cover. So in other words it could afford to service its interest four times over. You can imagine therefore in terms of its resilience to a potential slowdown in the business it’s actually quite high. If it was maybe only one times you could imagine that even a mild slowdown perhaps in terms of the activities of the business will straight away make them struggle to pay their interest bill. So seeing that four times number gives you quite a lot of confidence in terms of the quality of the business they’re investing in.
Presenter: Okay. So you’re getting a 6% yield from a company which has ample cash resources to pay its coupons.
Christine Johnson: Exactly.
Presenter: To pay its interest bills, so that’s really interesting. Now, Virgin Media, a brand which people will be familiar with. I’m not sure that it actually belongs fully to the Virgin Empire anyway, but Richard Branson still features very prominently in the advertising so. And they’re paying 6.5% yield - again, a good return relative to the kind of returns that you would expect on sterling in the UK. What is that you’re looking at with Virgin?
Christine Johnson: Well Virgin’s an example of a number of cable companies that exists in the high yield market, and we actually own several of the European ones as well. What we like about those we see them as the new utilities. You will give up quite a lot in your life before you have your broadband turned off or you lose your TV, so it has actually that really stable defensive characteristic. And what we like about Virgin particularly is it has this idea of quad play or quadruple play. So when we’re saying that that’s basically you get your TV, your broadband, your landline phone and your mobile. So the value of that is the cost for a business like Virgin is acquiring a customer. And it’s billing them and it’s making sure they have that continuous dialogue with them, that’s the expensive bit.
So clearly the more products that you can sell each individual customer, the more profitable, the more valuable that customer is for you. And on the other side, if I’m a customer and I’m receiving both my TV and my broadband, my landline phone and my mobile from one provider, I’m quite locked in. I’m quite sticky as a customer. So that also reinforces the idea. Now for Virgin as a whole most of their customers are taking about 2½ products from them. That’s nice, that reinforces the idea of this utility like cash flow is coming from this very defensive characteristic. But 15% of their customers are taking all four. So from there you can see well there’s actually still some scope for growth of the business as they actually push people up the value chain to take more services from them.
Presenter: So you’re getting this good yield, but in fact there’s still an opportunity really for Virgin to continue to grow its revenue, which is good in terms of being able to meet its commitments. Christine, can we just have a little look at some of the outcomes for the fund? We’re just looking at calendar 2012 here, and this chart is return is on the vertical scale and risk as measured by standard deviation is on the horizontal scale. Just what is it that we’re trying to find out by looking at this chart, Christine?
Christine Johnson: Well this is the way of thinking of balancing risk and return. It’s how we also think about when I talk about respect for client capital. Where you want to be is in the top left hand quadrant of this chart. That means that you’re achieving your best return or your lowest volatility - it’s a holy grail of investing. We are the green blob there that you can see, and the other grey dots, they are the rest of the peer group.
Presenter: So you’re in a pretty good place there, because in fact you’re buying a strong return for a relatively small amount of risk.
Christine Johnson: Exactly. And what’s reassuring looking at that as the kind of proof statement that we are actually doing this is very few, in fact only one fund has produced a better return than we have with lower volatility in the last twelve months. This is really important that we monitor this. There is a tendency to have style creep. While trying to make sure that you reach your income target or your total return target, there’s a tendency perhaps to let go of that idea of maintaining capital and keeping volatility low. So if something like this helps us to track that and make sure that our three obligations, income, total return and respect for clients’ capital, are all being looked after.
Presenter: Okay. And if we just look at the outcome for 2012, now I believe in 2012 the fund was in the top decile in terms of total return for the IMA global strategic bond sector, so an excellent outturn altogether, and what we’re looking at here is the monthly distributions, but what are the numbers that we’ve got here?
Christine Johnson: The numbers are actually annualised, and the important thing to actually take away from this, if you look at the consistency actually of the distributions that we’ve made over the last twelve months. So we haven’t really changed the strategy very much in order to make this now a monthly payer, it’s always been a monthly payer, and this idea of consistent distribution has always been there, and that’s just evidence of it. The current yield on the fund at the moment – the annualised distribution yield – is 5.6%. So again very kind of consistent with everything that we’ve been paying out over the last twelve months.
Presenter: And so we’re getting this over 5½% yield over the past three to four months, so a good level of income, certainly relative to other opportunities, certainly relative to cash and, indeed, to inflation in the UK at the present time. Christine, thank you very much.
Christine Johnson: Thank you.
Important Information
This video is intended only to illustrate the views of the fund manager(s), these are not necessarily shared by Old Mutual Global Investors, who have produced and issued this video, or the company whose website you may be viewing it.
This communication is issued by Old Mutual Global Investors (UK) Limited (trading name Old Mutual Global Investors), a member of the Old Mutual Group. Old Mutual Global Investors is registered in England and Wales under number 02949554 and its registered office is 2 Lambeth Hill London EC4P 4WR. Old Mutual Global Investors is authorised and regulated by the UK Financial Services Authority (“FSA”) with FSA register number 171847 and is owned by Old Mutual Plc, a public limited company limited by shares, incorporated in England and Wales under registered number 3591 559.
It does not purport to be all-inclusive or contain all of the information which a proposed investor may require in order to make a decision as to whether to invest in the Fund. Nothing in this document constitutes a recommendation suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. No investment decisions should be made without first reviewing the prospectus and the key investor information document of the Fund which can be obtained from www.omglobalinvestors.com.
Please remember that past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested. OMGI 03/13/0046
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