Bond veteran Eric Holt has admitted he should have held on to a 100-year bond from utility giant EDF Energy for longer after he missed out on further bumper returns.
The manager of the Royal London Sterling Extra Yield Bond fund had bought the security because he thought it was an anomaly for a company to issue such long-term debt.
He said the fact the bond had a 6 per cent coupon was “extraordinary”.
He held the security for six months leading to a 28.6 per cent gain on his initial investment, but he had to watch as the price rocketed even further after he relinquished the holding.
“It was – forgive the tongue-in-cheek expression – a disaster,” he said.
“We bought it earlier in [2014] for 98p. We sold it in August at the highest price it had got to – which was 126p – and so we made [almost] 30 per cent on our investment in six months.”
However, the fall in gilt yields that characterised the second half of 2014 saw the price of the energy company’s bond rise further to 150p.
“We capitalised and made an attractive return for our investors but we missed out on the ‘shoot-down’ in gilt yields,” Mr Holt added.
In spite of missing out on further outsized returns from this holding, the manager’s long-term track record is strong.
Mr Holt’s fund comfortably ranks third in the IA Strategic Bond sector, delivering 74.7 per cent in five years and 43 per cent in three years, according to data from FE Analytics.
However, his near-term numbers have dipped relative to his peers.
Mr Holt suggested funds with a greater sensitivity to the declining gilt yields appeared to have enjoyed a short-term uptick.
Elsewhere, the manager said he bagged “exceptional” gains from Phoenix Life, which was a top-10 holding at 1.8 per cent of the portfolio.
The closed-fund life company has performed well recently. It is unrated – as is a significant 39.5 per cent of Mr Holt’s fund – but is currently seeking an investment grade.
Mr Holt said many companies in the financial sector as a whole, which makes up more than 29 per cent of his portfolio, were paying investors a premium to tweak the terms of their bonds in order to meet up-to-date regulatory requirements.
“There is a shift in the nature of bonds,” he said. “We are seeing some ‘old-fashioned’ bonds issued where the company wanted to tweak the terms of the bonds and make them better for regulatory purposes.”
He said Phoenix solicited investor support for such changes in December 2014, paying a 5 per cent consent instruction fee.
“That was a significant payment to bondholders and enhanced the performance of the fund,” he added.
