Fixed income has seen an extended bull run and, for investors and asset managers alike, it has provided some easy wins. However, as the US pares back quantitative easing, investors are having to be more discerning in their fixed income exposure. TwentyFour Asset Management, a specialist fixed income boutique of five years standing, has set out its stall as a provider of niche, targeted bond funds uniquely adapted to the prevailing market environment.
The group was founded in 2008 by seven partners with an eclectic mix of investment banking and asset management backgrounds. Chief executive Mark Holman admits it was a challenging time to launch, but they were united by a feeling that relatively few players in the market, particularly the investment banks, were looking forward.
“What we saw at the time was a desperate need for advice in fixed income. There had been the credit boom and all sorts of managers had added layers of risk, not understanding how volatile that would be,” Holman says.
The group built its business to provide both consultancy services and asset management. Initially, the demand for advice was far greater than for asset management. They knew that ultimately they wanted to deliver asset management as well, but did not launch their first fund until a year after the business started.
With hindsight, Holman says, the decision on which products to launch was relatively easy: “We looked at the market and opportunities and where it would be possible to make clients some money. Then at each stage we asked ourselves whether we could do it at least as well as anyone else.”
The group looked at the economic climate and tried to anticipate the needs of their end investors. The result was the Monument Bond fund. Holman says: “The banking system was under stress. There was a sense that if investors left their money in the bank, there was a lot of risk and almost no return. As a result, the risk return profile of a deposit did not work well any more. It made sense for people to start looking elsewhere.”
At the same time certain assets had been hit hard by the credit crisis. Some higher quality assets had become guilty by association with some of the worst offenders in the fixed income market. RMBS –residential mortgage-backed securities – were one such asset class. The high-quality end offered opportunities because the whole asset class had been tainted. This was where the Monument Bond fund directed its attention.
The distribution side was trickier, at least on the wholesale side of the business. The partners’ backgrounds had been very institutional and bespoke institutional mandates made up much of TwentyFour’s assets under management in the early years. When the group launched the Monument Bond fund in August 2009, it recognised that it had to bring in outside help to build traction among its target wholesale investors.
It hired third-party distribution specialist Gemini to help it raise assets. This proved a fruitful relationship, with the fund reaching £100m just six months after launch. Holman says it helped the group get to know the retail market. That said, the group has now built sufficient momentum to hire its own distribution team and has John Magrath on the retail side and Alistair Wilson on the institutional side raising assets. The group has found that its widely-read blog has helped it build name recognition in the market. It recently took on a large bespoke mandate for Skandia which also added to its profile.
With its first launch out of the way, the group pondered how to expand the range. Although Holman says he would ultimately like to have the whole suite of fixed income products, he recognises that in the short-term at least, the group needs to take a more targeted approach.
For its second launch, the group recognised interest rates had gone as low as they were going to go. Therefore a bond investor needed maximum flexibility to move around through the different places of credit risk and the interest rate cycle. This prompted the launch of a strategic bond fund in May 2010 – the TwentyFour Dynamic Bond fund.
The group launched the TwentyFour Focus Bond fund in March 2012, which also sits in the IMA £ Strategic Bond sector. Next the group sought to address the problem of yield, launching TwentyFour Asset Backed Income fund in January this year.
The group also sought to take advantage of the liquidity premium now available in fixed income assets by launching a closed-ended fund in March. The TwentyFour Income fund raised £130m in assets and continues to grow rapidly. This strayed into less liquid areas such as floating rate notes.
Holman notes: “Fixed income trades over the counter. There may be 20-30 dealers and you do not see all the prices and offers. It is very opaque. The banking side certainly has less assets to commit. There are opportunities that are more illiquid and are not suitable for open-ended funds.
“The TwentyFour Income fund focuses on the less liquid parts of the fixed income market, with a higher income and no interest rate risk. It is well suited to the current interest rate environment. Investors are being paid a lot for liquidity risk. This was our first foray into listed funds and it went well. We would certainly like to go back to that area.”
On product development, Holman concludes: “We have only been going five years. We recognise that we cannot have every product but we aim to gradually build up a complete suite. We are launching where it makes sense and where we can manage it at least as well as everyone else.”
Certainly early performance has been encouraging. All the funds have beaten their sector averages since launch and the two strategic bond funds remain near-top of the £ Strategic Bond sector, against some stiff competition. The group is increasingly receiving plaudits from multi-managers, who are happy to have an alternative for their fixed income holdings.
Holman says that TwentyFour is now in a better position to launch funds: “One of the challenges of being a small independent fund manager is that you cannot launch with £20m of your own money. We have had to launch with a few hundred thousand initially and that has certainly been an impediment to growth. We believe that with our history and relationships it will be much easier to launch funds now.”
Holman says the group would certainly like to launch another closed-listed fund. With the banks under pressure and a lot of attractively priced assets sitting on bank balance sheets, there are opportunities for canny fixed income markets to exploit.
In the institutional space, the group is looking at an absolute return fund in partnership with a large institutional investor. Holman says there is a real need for an alternative to cash. “Half the European money market funds have closed – the returns are negative in many cases,” he says. “There is also a clear and present danger for investors in cash after the Cyprus crisis. Every financial director is getting a call from their CEO asking about their deposit risk. They need an alternative to bank deposit and money market accounts. This will be our project for the next six months.”
The group is also planning to take advantage of the changes brought about by the RDR. Holman says: “As more money moves to wealth managers, they have to show they are adding value. We have structured bespoke offerings for individual financial advisers, who can then be very targeted in their fixed income exposure. We think we will do more of these things. For groups, it means they can show clear added value to their clients from this sort of structuring.” It has run mandates for Psigma, for example, with targeted redemption debts.
The group will celebrate its fifth anniversary in September. It has continued to build its investment team, with the recruitment of Douglas Charleston from Lloyds Bank in June. Holman says the group would not have to recruit significantly from here to launch new products. The investment team is eight managers strong, as large as many teams running significantly more assets. The group prefers a flat structure, with lots of senior managers working together, rather than one senior manager supported by analysts, as seen with a lot of asset managers.
In terms of recruitment, the focus is likely to be more on the distribution than on the investment side. The funds are on all the major platforms, but the group continues to invest in this area and in building up its sales teams.
Holman says they have had no problem attracting interest. The group runs as a boutique and styles itself as free from conflicts of interest, capacity constraints and ownership distractions – increasingly the type of environment in which the next generation of finance professionals want to work. Holman is proud of the team’s stability. In its five years since launch, only one receptionist has left. It now runs over £2bn in assets, of which about half is in institutional assets.
Holman says the group has scale and ambition. It wants to broaden its distribution base and continue to build its track record. At a time when investors badly need an alternative to conventional fixed income funds, TwentyFour’s fund range should find increasing momentum.
The independent views
Tim Cockerill, head of research, Rowan Dartington
”I see TwentyFour Asset Management as a specialist manager who came to the market with their mortgage-backed securities fund, Monument, initially. This was their key area of expertise and the fund has done well enough, although it has been a little more volatile than I had anticipated. Their Dynamic Bond fund also has a good record albeit with perhaps a higher level of volatility than many of its peers. That said, in this sector the differences are to an extent marginal. There is a focus on sub-investment grade and with this comes risk – the fund was caught with Co-op bonds. However, the yield is high at over 6.5 per cent. There is no doubt they have areas of expertise and their funds may slot into some client portfolios but careful analysis of the funds is needed to ensure the fund fits the client requirement.”
Tom Becket, chief investment officer, Psigma
“We first met TwentyFour Asset Management when they were marketing the Monument Bond fund, a portfolio of high quality RMBS assets. We liked the concept, invested, and that worked out well over two years and we got to know them. We got to know Mark Holden very well and we discussed the possibility of structuring a fixed duration, fixed income portfolio for us. They built a £60m, high-quality portfolio of European investment grade and high-yield securities, which redeemed or were likely to be called by the end of 2016. This gave us significant certainty over returns. It was very successful. We have since participated in the TwentyFour Asset Backed Income fund, launched at the start of this year. They run about 7.5 per cent of our total assets under management and we believe that in the fixed income space, they are the best out there. They have high-quality investment professionals and provide us with considerable insight, which we like when we are outsourcing.”
David Hambidge, head of multi-asset, Premier Asset Management
“We have recently taken profits in the TwentyFour Monument Bond, though we still have a small weighting. That said, we took profits because they were there to be taken and they did a great job for us. We were originally attracted to the fund because it was investing in all those areas that other people did not like, such as mortgage-backed securities, but it was operating at the quality end of the asset class, those bonds that had lots of cover. The market came back to these assets in some style and the fund has had very strong returns. The group also scored highly on our due diligence ratings. We used the fund in our income mandate and have parted good friends.”
TwentyFour Asset Management is a fixed-income boutique, founded in 2008. The group has eight investment professionals that currently manage about £2bn across four open-ended funds, one investment trust and a series of segregated institutional mandates. It describes its approach as ‘rigorous and detail-oriented’ with a strong focus on capital preservation.