The significant shift away from ‘bond proxies’ in the current market was clearly signposted by the rising valuations and limited outlets, which allow Ian Heslop to avoid the ‘dramatic unwinding’ these positions now face.
Speaking during an investor update conference call, Heslop, who is head of global equity at Old Mutual Global Investors, said yield-hungry investors had crowded dividend-paying equities in seemingly safe areas of the market, which has left them vulnerable to current rotations.
Focusing on the $7.13 billion Old Mutual Global Equity Absolute Return fund, Heslop said his team had no special foresight on ‘bond proxies’ being sold-off beyond the apparent over-valuation of stocks in this bracket.
‘We have seen from pretty much the beginning of last year that the dividend yield was quite expensive. The idea of bond proxies is using equities for dividend and we felt correctly that these bond proxies compared pretty similarly with equities showing dividend with similar valuations but perhaps paying a lower dividend. This was one factor pushing us out of these individual stocks themselves.
‘From a sector perspective, we are not in the game of taking very large sectoral positions, so you can argue explicitly this two ways. You could argue that dividend or bond proxies are concentrated into certain sectors and these have been thrown around by expectations of interest rates in the US, which is something we don’t play. We are not interested in that type of extreme return profile.’
Heslop said he and his team, which is comprised of Amadeo Alentorn and Mike Servent, made pronounced moves away from areas such as healthcare and telecoms over the course of 2016. This included a number of shorting opportunities and changes in net sector positioning.
‘Big changes included financials, which went from a strong short in the summer to a long position by the end of the year. Healthcare has moved in the opposite direction and telecoms was also moved to the biggest short position and the unwinding of dividend yields was definitely an impact.
‘Within sectors we are very cognisant of how much you are paying for dividends relative to other kinds of returns. So we are confident this approach has helped to shelter the portfolios from what has been a very dramatic unwind for some sectors.’
The Old Mutual Global Equity Absolute Return fund returned 10.5% in euro terms over the three years to the end of November 2016. This is compared with a 1.1% return by the average manager in the Alt Ucits – Market Neutral sector over the same period.