Martín Sauto heads up a team that runs six funds-of-funds, which until recently only invested in single asset class funds. His team would then decide how much to allocate to each fund on the basis of their asset allocation views. But this has changed for the fixed income part of the portfolios. The Spaniard believes bond funds need to be more nimble in their hunt for yield.
“As it has become increasingly difficult to determine where to find the best opportunities for yield, we decided to outsource this to specialised managers,” says Martín Sauto. “Our investment in the Robeco Global Total Return Bond Fund in early 2015 marked the switch to this new approach.”
So why this fund? The short answer is that manager Kommer van Trigt, who has run the fund (which itself has a track record going back to 1974) since 2011, shares Martín Sauto’s investment philosophy. “He has a conservative mind-set like we have. Controlling drawdowns is the most important thing for us, and the fund does that very well,” he says. “They have had monthly drawdowns of over 3% just three times [since 1974].” Since Van Trigt started running the fund, the maximum monthly loss is 2.06% (before costs), incurred in June 2013.
Managing volatility well is usually a condition for limiting drawdowns, so no wonder this is also important for Martín Sauto. “We want managers who are concerned about volatility, and
the Sharpe-ratio needs to be above 1,” he says. The volatility of the Robeco Global Total Return Bond/Rorento Fund has hovered slightly above 3% for the past five years or so, but returns have come down steadily in the past few years because the fund is primarily invested in government bonds. The three-year Sharpe ratio therefore only just about exceeds the 1-mark at 1.02.
Here we have arrived to the flipside of the fund’s conservative strategy: it has underperformed its benchmark, the Barclays Multiverse Index, for the past three calendar years, as it has a higher exposure to government bonds (73% vs 51% for the index) and AAA-rated securities (65% vs 49% for the index).
The underperformance is not necessarily a problem for Martín Sauto, since he bought the fund as a government bond substitute, and not chiefly for its alpha capabilities. “We also own more aggressive funds that have a higher exposure to corporate bonds,” he explains. The difference with most strategic bond funds, a newer breed of fund that tend to take bolder asset allocation bets in an attempt to achieve higher returns, is also reflected in fund fees: The total expense ratio of the Robeco Global Total Return Bond Fund is only 0.52%, while most unconstrained bond fund fees are more than twice as high.
Unsurprisingly however, conservative, low-volatility bond funds like the Robeco Global Total Return Bond Fund make up the majority of Bankia’s fixed income investments. “In our low-risk fund, which has had volatility of about 1.5% over the past three years, we hold 20 to 40% in government bonds, plus 30% in deposits.”