Case Study - CC JCB Dynamic Alpha Fund
Jamieson Coote Bonds recently launched its third government bond offering - the CC JCB Dynamic Alpha Fund - to retail investors. Chief investment officer Charlie Jamieson explains why managing a bond fund with no natural index can give investors better absolute returns.
Describe the product
The CC JCB Dynamic Alpha Fund aims to outperform the RBA Cash Rate by 2.5 per cent per annum (after fees) over rolling three-year periods by only investing in global high grade government issued assets in G7 nations and Australia, keeping the underlying asset pool of the highest quality.
The fund has no natural index, that is, we've removed the beta allocation to make a more absolute return style, lower volatility offering with no credit exposure. It’s designed as a defensive alternative that is uncorrelated to traditional fixed income market benchmarks and risk assets.
What went into launching this product?
We commenced managing a global absolute return mandate in May 2017 with the intention of building a track record with a view to launch the managed investment scheme in 2021. However, the speed with which financial markets sold off during March this year saw many fixed income investors become subject to illiquidity, from an asset class that characterises itself as being liquid.
As a high grade bond manager, we had no problem servicing our clients’ liquidity needs but quickly realised how many investors had felt the ramifications of this event as well as rising credit sell spreads. Today, we are faced with historic low bond yields and the rising uncertainty about the role that fixed income should play in an investor’s portfolio. This was a major catalyst for us.
We spoke to many of our investors, including high net worth advisory groups and wealth managers, who were seeking a solution of this nature. For many of their risk averse clients, the options for consistent income are credit based, and often liquid credit or corporate bonds are highly correlated with growth assets. This helped us design a retail product that could provide genuine defence and liquidity through all market conditions.
Why did you decide to launch now?
Early on in these conversations we experienced demand from our clients – who in the current climate were seeking to offset other risk exposures, such as equities and credit, but also benefit from regular income and daily liquidity.
Since the formation of our business in 2013, we have been advocating that investors look at fixed income in a different way and not a ‘one size fits all’ approach via a composite benchmark, which we believe is no longer fit for purpose. Asset allocators and investors are now realising the benefits of disaggregating fixed income allocations in order to build portfolios for defensiveness, diversification, income, and liquidity. In this uncertain Covid world, we knew it was the ideal time to provide investors with a high quality alternative fixed income strategy, in a way that represents a truly defensive and diversifying source of returns.
What challenges did you face and how were they overcome?
Being our third fund, the establishment of this fund was relatively streamlined. The co-founders of Jamieson Coote Bonds are the initial seed investors in the fund and continue to add to the fund. We believe investors are looking for a fund that can generate a decent return but whilst also taking small amounts of risk. We focus only on our best ideas and are carefully guided by our risk management tools, processes and systems. By not having the constraints of an index, the fund offers the potential for decent returns in a very highly rated asset class but also with tremendous liquidity. The pitfalls of March 2020 highlight investors’ need for taking on more risk to generate returns, at the expense of defence and liquidity. As markets face significant uncertainty – the fund aims to generate positive returns regardless of the market direction of bond yields.
Can you explain the fee structure?
The fee structure is simple and comprises a base fee of 0.58 per cent and administration fee of 0.10 per cent, therefore a total feel of 0.68 per cent per annum. There are no establishment, contribution, withdrawal or exit fees.