FE Alpha Manager Hodges has run the fund since launch in 2007, during which time it has swelled to £2bn in size. L&G say they have no plans to hire an outside replacement and that high yield manager Martin Reeves will take over, backed by a team of 70 fixed income specialists.
However, Darius McDermott, managing director of Chelsea Financial Services, says it will be hard for L&G to replace Hodges input given the specialised style of the manager.
Hodges is very good at eking out returns while taking minimal amounts of risk, McDermott says, and it remains to be seen if other managers can replicate this performance.
McDermott compares the situation to the problems that Schroders had when Richard Buxton, who had a very distinctive style, left their UK equity fund.
Yet Reeves says his intention is to continue where Hodges left off and there will be no dramatic change in strategy.
“The strategy is set up to work very well for the next few years given the headwinds and opportunities in fixed income markets,” he said.
“There will be no change in strategy here, we hope to maintain the performance level of the fund in terms of income and capital protection.”
“At the current time protection means protecting against any movements in the yield curve.”
Reeves is also manager of the L&G High Income fund, meaning his experience has been with a more specialised portfolios than the strategic bond fund which has the ability to buy all areas of the fixed interest market.
Roger Bartley, head of fixed income at L&G says that the wide team behind Reeves will allow the fund to be managed successfully to this wider mandate.
L&G Dynamic Bond has a poor three-year record thanks to a tough 2011 in which the fund lost 3.38 per cent. The manager suffered a motorcycle accident that year.
Although it has performed above the sector average in the two completed years since then and in 2014 so far the fund is still bottom quartile over three years.
Performance of fund vs sector over 3yrs
Source: FE Analytics
However the long term track record is still very good thanks to the fund’s performance in 2008 when it managed to avoid the worst of the market’s losses. It then rebounded more strongly in 209 than its peers.
Performance of fund vs sector since launch
Source: FE Analytics
Reeves says the chief dangers he sees in the market concern the prospects for inflation in the UK and also for China to export deflation. Both dangers are unappreciated by many in the market, he says.
“I think the market actually shows some complacency about what can happen in the case of inflation and how that could filter through into rates,” he said.
“The other area is in China, where we are trying to work out the ramifications of the China slowdown and how that will manifest itself in China and in the global economy.”
“The China government acting to stop that slowdown probably means we have an expectation of deflation and exporting deflation to the rest of the world and the developed markets.”
Reeves also highlights the ability of the fund to use derivatives to hedge risks and also to opportunistically add alpha, whether that be by taking positions in single names or whole sectors.
He stresses the continuity between his view and that expressed through the fund in the Hodges era.
“They key themes are the same: synchronized global expansion with default rates low therefore an attractive time to invest in credit,” he said.
“The main hazard is interest rate rises, which means make sure you keep duration low and buy protection against rates moving higher.”
Most of Reeve’s experience has been in the high yield area of the market. He is currently head of global high yield, having previously headed US high yield research at UBK Asset management before running Credit Research at AllianceBernstein.
Data from FE Analytics shows that his L&G High Income fund has returned 23.51 per cent since Reeves took it over in November 2011. The average high yield fund has made 29.03 per cent.
Performance of fund vs sector since Nov 2011
Source: FE Analytics
L&G are stressing the collegiate nature of the management of the fund after the departure of Hodges, and say that the specialist knowledge of the other members of the team should make the transition smooth.
Rob Gleeson, head of research at FE, has downgraded the fund from a buy to a hold while the team prepares to meet the new manager and take a view on his plan.
His team regard Hodges highly due to his record over 24 years of fixed income investing, he says, while they have not yet met Reeves.
Gleeson says he has no fears for the short-term performance of the fund.
