1. Bond Beats – Allfunds

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  2. The value of an investment in the fund, and any income from it, can fall as well as rise and investors may not get back the amount invested.
  3. If you’re reading this, it’s likely you are already familiar with Allfunds – the online marketplace that connects investors with fund providers, like Baillie Gifford. 

    Fund platforms, which have been around since the early noughties, have been a game changer for the investment industry. Previously, fund buyers would be locked into referrals through an intermediary, but internet technology has made it possible to showcase investment funds on a neutral platform and open up the process of fund selection.

    The transition to more choice and transparency has been popular both with investors and financial regulators. Today more than two trillion euros of assets are held on fund platforms in Europe. Allfunds has emerged as the industry leader: by the end of 2018 it had 15 per cent total market share and a recent deal with Credit Suisse means Allfunds now has more than 500 billion euros under administration – more than twice its nearest competitor.

    As a financial institution ourselves, we knew first-hand about Allfunds’ good reputation. As an investment, it caught the interest of our High Yield team when the business changed hands and its new owners came to market looking for capital to part-fund the acquisition.

    While we recognised Allfunds could be a cyclical company, it struck us as a great potential addition to our portfolio. It is a highly scalable and cash-generative business, with each new customer costing the company less than the previous one. The business uses its good margins to invest in technology to reinforce its competitive position; it has introduced a range of analytics and reporting tools to serve the complex needs of the financial industry. And it has good standing in the investment community – voted best platform partner by fund providers in one major pan-European study. 

    All that said, there were a few things that concerned us.

    When analysing companies, we select key milestones that help us monitor the pulse of that company. We believe thorough research, even in the fast-moving high yield bond market, is one of the ways we can be good stewards of our clients’ capital. We don’t cut corners. If we can’t find information related to our milestones, or if company disclosure is poor, that can be reason enough for us to sell.

    As we analysed the information the new owners had published for bond investors, we noticed that there was no detail about client flows – how much new business was generated from new or existing clients – nor geographic diversification. Until that point, banks Santander and Intesa Sanpaolo had been Allfunds' main clients. If the business were to be resilient over the long-term, its client base needed to gradually diversify – and we needed to see proof of that. 

    At this point other bond investors may have accepted that the company didn’t disclose this information and held onto the credit in good faith. But, as part of an independent partnership that values bottom-up research, we have the time and resources to go that extra mile. We scheduled a call with the new Chief Financial Officer to express our concerns.  

    While we appreciate that some information cannot be shared for competitive reasons, improved transparency can be helpful for the whole bond market and means we can invest with even more conviction.

    In this instance, our efforts paid off. The new CFO was receptive to our enquiry. A few months later, the missing information was made available to the company’s bond investors and we were able to hold Allfunds with confidence in our High Yield portfolio.

     

    Annual Past Performance to 30 June Each Year (%)

     

    2015

    2016

    2017

    2018

    2019

    Baillie Gifford High Yield Bond Fund (B Inc Shares)

    -0.7

    0.9

    12.6

    1.7

    6.7

     

    Source: FE, single pricing basis, total return.

    Past performance is not a guide to future results.

  4. IMPORTANT INFORMATION AND RISK FACTORS

    The views expressed in this blog should not be considered as advice or a recommendation to buy, sell or hold a particular investment and it does not in any way constitute investment advice.

    This communication was produced and approved on the stated date and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

    This blog contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.

    Bonds issued by companies and governments may be adversely affected by changes in interest rates, expectations of inflation and a decline in the creditworthiness of the bond issuer. The issuers of bonds in which the fund invests may not be able to pay the bond income as promised or could fail to repay the capital amount.

    Issued by Baillie Gifford & Co Limited which is authorised and regulated by the Financial Conduct Authority (FCA).

     

    Ref: 41240 IND WE 1400