Rob Ford, partner and portfolio manager, and Mark Holman, managing partner at TwentyFour Asset Management, answer SCI's questions

Q: How and when did TwentyFour Asset Management become involved in the structured credit market?
MH: TwentyFour AM was launched in September 2008. The firm is young, but has old heads, many of whom have previously worked together - Rob and I spent seven years at Barclays Capital together, for example.

We currently employ 11 people and everyone is a fixed income specialist. There are four portfolio managers, as well as three staff in management, three in operations and one in distribution.

Our skill-set is in managing client money and consequently we outsource several functions such as the middle and back office, as well as the bulk of the distribution function. By outsourcing these functions, we're not tying up portfolio manager resources with interferences such as any trade glitches that may occur - our in-house operations team deal with all of these issues before everything is outsourced. Portfolio managers should be spending 99% of their time doing their best for clients without any distractions.

Q: What do you think you do differently from other managers?
MH: I believe our philosophy differentiates us from other managers.
Mark Holman                                                    We have four senior portfolio managers managing our funds. Most of our competitors tend to employ one senior manager and surround them with analysts or junior PMs.

With credit, the very best an investor can expect is their money back at maturity, plus interest in the meantime. But, regardless of how much experience an analyst may have, there is often a hierarchical element that means some opportunities will be missed. The combined experience of our portfolio managers, who have all been through a number of cycles, means that there are four pairs of eyes looking for surprises, as well as opportunities.

Our investment process is our 'USP': we sell on detail. Our portfolio managers do their own research and deal monitoring, and their experience means that they recognise the relevance of any unusual details. We have a top-down/bottom-up approach to investment: top-down analysis determines the direction, while credit surprises typically occur bottom-up - so it is here where we do the bulk of our work.

RF: It takes about a week to analyse a new structured finance programme. We read every piece of documentation; we see it as a route map in terms of what could happen to a bond.

Before buying a bond, we present an argument for doing so to the credit committee (comprising the whole of the PM team), who will pull it apart and try to find any weaknesses. Only when there is unanimous agreement will the bond be purchased.

The portfolio managers will construct a monitoring template for each bond, outlining the key performance indicators, and should a bond start to begin performing unexpectedly, we'll decide what remedial steps to take. We underwrite the bond as if we're holding it to maturity and will typically only sell for a relative value opportunity or to divest a position we no longer like.

Q: What are your key areas of focus today?
MH: As a boutique, we cover fixed income only and major heavily in credit - from high yield to high grade bonds.

Initially, we began by offering bespoke portfolio management for institutional investors. In fragmented markets, different clients have very different views
Rob Ford                                                   which makes bespoke more attractive.

Many investors also needed credit advice. We didn't set out to be an advisory firm, but many clients have needed help in terms of valuing portfolios or undertaking risk assessments - and this has sometimes led to asset management mandates.

We currently have assets under management of over £200m. Our first mandate was £70m, which we secured shortly after launching. Given the difficult market we've endured for the last two years, it's not been easy to raise risk assets, so we're pleased with the progress we've made, and appetite is also picking up now.

Q: What, in your opinion, has been the most significant development in the credit market in recent years? How has this affected your business?
MH: Clearly, the near collapse of the banking system. Many investors were frightened about leaving their money in banks, given what happened last autumn. We began getting phone calls from many investors looking to take money out of banks to invest in bonds and wanting advice from us. So we started thinking about the need to diversify and structure a fund that appealed to a broader market - i.e. those who wanted a reasonable return with as little risk as possible.

We discussed launching a corporate bond fund as money was pouring into that sector, but decided - particularly because of the potential interest rate risk - that a forward-looking conservative strategy would be to focus on high grade credit on a floating rate basis - namely AAA/AA rated RMBS. This was the genesis of the Monument Bond Fund - the first UCITS III structure to invest solely in the broader RMBS markets (see SCI issue 140). It has exposure to the UK, European and Australian markets.

We opted for a UCITS III structure and so the fund provides investors with daily liquidity. Gemini Investment Management is the distributor for the fund.

We aimed to launch the Monument Bond Fund at the beginning of July, but the timing slipped by a month. Putting the fund together has been a long process: we began thinking about it in January, with the aim of moving away from the institutional investor base towards a broader investor base, especially retail. We've been marketing to wealth managers, large IFAs and multi-manager funds that are managing money on behalf of retail investors all around the country and are now achieving steady and consistent growth.

RF: A UCITS III structure is necessary in order to tap into the IFA community. They're not specialists and so it was challenging to educate them on the solidity of European RMBS, especially after what they may have read about the US market.

The UCITS III platform has limits on leverage, as well as rules regarding diversification and liquidity to make it safe for a broader investor base. Our fund has no leverage and has daily liquidity.

The reception to the fund has been good: we were able to stress-test the structure in front of clients and demonstrate that European RMBS is more predictable than any other asset class. Even the most sceptical investors can revise their opinion if you're transparent about the structure and your assumptions.

Q: What is your investment strategy going forward?
RF: We're getting £500,000 or £1m chunks of investment nearly every day and so we're pretty much in the market on a daily basis. The Fund is now over £30m, but it could quite possibly reach £100m by the end of the year.

By comparison, most retail funds never get above £10m. The amount multi-managers allocate to the fund can grow as Monument grows, so there's good repeat business there. On average we're probably executing a trade a day in order to maintain a broad range of maturities and investing any cash from bond amortisations and redemptions.

Currently the fund comprises around 25 positions and the aim is to try and find enhanced value by looking at smaller chunks of paper that don't necessarily suit banks or pick them up from distressed sellers. We have a universe of bonds that we've already done the work on - a back catalogue - which means that we can react nimbly if a deal is offered that's within this universe.

The market is moving quickly in terms of spreads, but not necessarily in terms of positions, so there tends to be enough time to do the credit work. Certainly, we can indicate our interest in something relatively quickly and lock in the pricing as necessary. Monument is ideally suited to this environment because money is coming in in dribs and drabs.

Looking ahead, we're preparing to launch a high grade CMBS fund with Rutley Capital Partners (see SCI issue 155), which will benefit from their direct experience in the commercial real estate marketplace and large property investment management portfolio.

There is an enormous amount of money being allocated to commercial property right now. Prices declined by 45% between June 2007 and June 2009, which is proving an attractive investment for foreign investors. Our new fund should produce similar returns to direct property investment, but with a different risk profile.

Q: What major developments do you need/expect from the market in the future?
MH: There has essentially been a rally in rates products for 20 years, with base rates dropping from 15% to 0.5%, and so logically the next trend in rates can only be up. Consequently, there's a lot at stake for fixed rate investors, so we believe having a floating rate approach to credit makes sense at the moment.

We also think there is more value in ABS than plain corporates at the moment. Yields on corporate bonds are lower than yields on RMBS, which is just plainly wrong, but it demonstrates that pockets of value remain out there.

Consequently, we're starting to see institutional investors taking profits on corporate bonds and moving into other sectors, including RMBS. This will help to grow our AUM quite quickly going forward.

RF: We may look to launch a dynamic bond fund in the future. Our overall view is that the market is currently on a strong roll and it will take a major event to knock it off course. But there is likely to be a slow-down in the rally as we approach year-end - although this is fairly typical, as banks begin calculating their capital ratios.

ABS remains fundamentally cheap for the credit quality available; there is also a supply versus demand imbalance. But the lack of new issuance is likely to continue for the foreseeable future because the economics still don't make sense for issuers - there's not enough margin in the underlying loans to sustain issuance.

However, issuers such as Nationwide and HBOS are building platforms for the future and demonstrating that they can stand on their own feet. Ideally, banks will also now begin moving away from central bank repo facilities and open out to new issues. We view this as a positive both for them and the market.

CS