‘Think different’: M&G’s Richard Ryan’s strategies on how to outperform

‘Think different’ was the slogan that helped make Apple a household name many years ago. 

It’s also the banner under which M&G senior credit portfolio manager, Richard Ryan, wants to establish his team’s credentials. Doing otherwise will not suffice.

‘If you do and build yourself exactly the same investment process and organisational structure as everybody else in the marketplace, you are doomed to perform in line with everybody else in the marketplace,’ he says. 

For obvious reasons, Ryan wants to outperform. He tries to achieve this in two ways.

The first is to encourage creative team thinking that gets his portfolio managers sharing ideas outside their mandate, rather than just wondering ‘Will this bond suit my own portfolio?’

‘Let’s say it’s a euro investment grade opportunity; I want them to think “Is it just good for the euro investment grade fund? Or could it be sufficiently good value to go into the multi-asset credit funds or indeed, a sterling fund or a global fund?”’

‘By having that matrix, you put the idea generation first and you have a collection of portfolio managers who are sufficiently attuned to what each and every portfolio is doing, so that investment opportunity can get into the right places.’

The second differentiator is to confine top-down forecasts of where the world is heading, to discussions in the pub or the coffee bar. 

‘Whatever my views are, they don’t filter into the portfolio in terms of what we choose to own. We are unashamedly bottom-up stock selectors. 

‘With each opportunity that comes around, what we’re asking are among the best risk management questions in history; “Do I get paid to take that risk? Is this asset compensating me sufficiently for the risks that I know exist and the risks that I don’t know exist?”’

As an example of thinking differently, Ryan points to how M&G viewed the prospects for the Disney entertainment and media empire as the Covid-19 pandemic crashed into financial markets in the spring of 2020. 

‘Had we gone to the analysts and asked them “What’s Disney going to look like in the next year?” they would have most likely said “It’s a disaster.”’ 

‘When you looked out of the window, there was nobody on the streets, things were shut down. The amusement parks were closed. They were spending huge amounts of money on the development of Disney+ streaming service and not generating a huge amount of revenue.’

Turning the telescope around, Ryan says, brought a completely different way of looking at things. 

‘If on the other hand, you said to them “Put earnings to zero, keep the liabilities live.” Does Disney still exist in a year?” Yes, of course. “Does it exist in two years?” Yes, of course, it does because it’s got this huge balance sheet with these fabulous assets.

‘So, if you ask the same analyst the same question in two different ways, you potentially get two different answers. So, you’ve got to think very carefully about how you approach your questioning around risk and around valuations. We spend a lot of time making sure that we’re asking those questions.’

The monetary response to the pandemic of course was to inject huge amounts of liquidity into the markets. That, in turn, (along with other factors, such as the war in Ukraine), drove up inflation and interest rates to make fixed income investing a harsh place for most of the past two years. Now, we believe times are different. 

‘I think credit at the moment is in quite an exciting juncture. We’ve come from a world where not owning credit was relatively easy with rates and incredibly low yields. Some credit assets were even trading at negative yields. We’ve now had a very sharp repricing of interest rates and yields are really quite attractive in my view’, says Ryan. 

There can also be a bonus in the lack of dispersion in the market. Bonds with different risk or reward outcomes are not getting priced differently. 

‘That’s a great opportunity. Some of the bad behaviour of the zero-rate world will ultimately, I think, come home to roost,’ Ryan added.

He gives as an example the highly technical world of additional tier 1 (AT1) debt issued by banks to strengthen their balance assets after the 2008 global financial crisis.

‘You could have two identical bonds, two identical structures issued by two different financial institutions, and they could have very different outcomes’. 

‘One could get called [the bank repays the debt early] and one might not. So I think we’re entering into a period where good quality credit research and good quality risk assessment around how you build those portfolios could really pay dividends’.

Finally, Ryan remains sanguine about corporate default rates, the subject of many a scary headline recently as interest rates have risen. 

‘Default rates have been rising ever so slowly. Outside an economic shock, outside of a sharp, unexpected recession, you would expect that default rate to tick up over time,’ he says. 

The actual interest rate that companies are paying on their debt does not seem as scary as some of the headlines might suggest. He draws a comparison with the residential mortgage world where long-term fixed rates are protecting many households for now. 

The crunch should come as these companies will eventually have to refinance at higher rates. 

‘If they’ve got two-year or five-year, or even up to 50-year debt outstanding, a company’s average cost of funds only increases as they need to refinance the existing borrowing. 

‘So we would expect that default would normalise over time - but it isn’t a cliff edge immediate tomorrow problem.’ 

The information provided should not be considered a recommendation to purchase or sell any particular security. The views expressed in this document should not be taken as a recommendation, advice or forecast.