A Risk Conscious Route to Income

Transcription

1 Wealth well managed FP BROWN SHIPLEY STERLING BOND FUND External Broker Selection Process A Risk Conscious Route to Income

2 Investment Objective The aim of the FP Brown Shipley Sterling Bond Fund is to offer investors a Risk Conscious Route to Income. The fund achieves this objective by generating a highly competitive level of income, whilst seeking to preserve capital over the medium term. In tandem, the fund aims to deliver a low volatile experience for unit holders. Specifically, the fund is mandated to be amongst the top decile of income generators within the Investment Management Association (IMA) Corporate Bond sector, whilst seeking to preserve capital over the course of a complete interest rate cycle. Broker Selection In accordance with best practice, this document details the selection process and policies utilised by us as fund managers when deciding on the use of external brokers for trade execution. As detailed in our other process documents (Investment Objective & Philosophy and Credit Selection Process) our due diligence process is performed entirely in-house. Since we perform all credit analysis ourselves, the need to access the opinions of rating agencies and other third parties is eradicated, leaving us with no reliance upon any external brokers for the provision of research or soft commissions. Given our self-sufficiency, our broker selection process is determined with due respect to the following elements: Efficient execution Depth of client base Access to primary market issuance Understanding of our investment process Agency vs. Proprietary Brokers Invariably, brokers take either an agency role in bond markets or will be tasked with undertaking proprietary trades on behalf of the organisation they represent. Since the use of proprietary desks requires a mutual co-incidence of wants in order to consummate a trade, in the interests of efficient execution, our preference is to execute orders via the use of agency brokers. When selecting agency brokers, our goal is to maximise the likelihood of being able to find a party willing to take the opposite position to our desired trade. Similarly, a secondary consideration is to

3 ensure that we are made aware of potentially suitable trading opportunities which may suit the aims and objectives of the fund. These objectives are assisted via the identification of brokers who have access to deep client bases and who are willing to take the time to understand our process and the type of trades which are likely to pique our interest. On a similar basis, our investment process allows for the use of non-rated bonds and/or the use of lessliquid positions where we determine that the issuer is of sufficient strength to warrant the resultant illiquidity premium. The trading in such bonds tends to be more specialised and hence performed by lesser known broking houses with a particular niche in the market. Whilst the frequency of trade execution with houses such as these will be few and far between, the maintenance of relationships is worthwhile. The use of proprietary brokers is purely strategic dependant upon market conditions. At times, the performance of corporate bond markets can be overly influenced by the level of primary issuance and so, in order to engage in the new issues market, we seek to maintain relationships with those brokers most likely to undertake book building for new issues. Whilst the execution of orders with primary brokers does not ensure best execution, the desire to retain the relationship and the benefits of achieving a worthwhile allocation on heavily subscribed new issues warrants the continuation of this policy. Determining Best Execution The corporate bond markets operate on an Over the Counter (OTC) basis. In the absence of a centralised exchange with all brokers compelled to post best bid and offer prices on publically available trading platforms, the ability to ensure best execution is simply not possible. As an OTC market, each and every trade represents a bilateral agreement between the respective parties to execute at a mutually agreed price. Since we are never compelled to undertake any specific trade, our investment process dictates what we consider to represent best execution via the invocation of our Fundamental Belief. Our Fundamental Belief states that, as investors, we should not accept risk unless we believe we are being suitably remunerated for doing so. In the event that a proposed trade offers what we would consider to be insufficient reward, then as fund managers we retain the power of veto over the decision to execute at the available price. Our policy to mitigate the limits of OTC markets lies again in our choice of agency brokers. Via the selection of brokers with deep client bases, the likelihood of achieving the best available market price for any directed trade, we believe, is maximised.

4 Credit Risk Trades conducted in the corporate bond markets are typically settled via, either the Euroclear or Crest settlement systems. Both Euroclear and Crest systems utilise a Delivery vs. Payment (DVP) mechanism, under which the settlement house makes simultaneous exchange of stock and monies. Under the DVP process, credit risk is minimised and as such, we feel, mitigates the need to undertake a credit check on brokers with whom we conduct business with. Order Allocation Our order allocation process is little more scientific than assessing with whom we are most likely to efficiently execute a trade with, based upon previous experience. In many cases, orders are generated via a reverse enquiry process under which brokers will inform us of lines of stock which may be available to trade. After consideration, in such instances, we will determine the price level we would be willing to execute at and relay this back to the broker. Should this be acceptable to the other party then the deal would be consummated. Corporate Hospitality Our policy on corporate hospitality is simple and clear. Corporate hospitality represents an inducement to undertake business with a particular broker. Other than the acceptance of a meal at which business conditions are discussed and for which we would offer to pay the bill or reciprocate the hospitality, no other hospitality is accepted. We believe this policy is clear, simple and avoids any potential conflicts of interest which may otherwise arise. Summary The Sterling Bond Fund deploys a multi-pronged approach to order execution via its choice of brokers. The use of agency brokers with deep client bases and an understanding of our investment process, coupled with the research independence upon which we pride ourselves allows for uncomplicated, efficient order execution. We maintain relationships with specialist brokers for the purpose of accessing more esoteric issues which by of interest to us. Though trades with such houses are infrequent, the benefits of keeping lines of communication open are warranted. Primary brokers, whilst not ensuring best execution, are utilised when executing trades such that the fund may gain access to new bond issues which may be of compatible with the overall investment objectives and philosophy. The mechanisms utilised by the various settlement centres effectively manage credit risks whilst policies exist for the mitigation of risks associated with conflicts of interest and order allocation.

5 call: visit: Brown Shipley Funds is a trading name of Brown, Shipley & Co Limited which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales No Registered Office: Founders Court, Lothbury, London, EC2R 7HE. Brown Shipley's parent company is KBL European Private Bankers which, from Luxembourg, heads a major European network of private bankers. FP Managers Limited is the Authorised Corporate Director (ACD) and is authorised and regulated by the Financial Conduct Authority. Registered Office: FP House, St Nicholas Lane, Basildon, Essex SS15 5FS The value of investments and any income from them may fluctuate and is not guaranteed. Investors may not get back the amount originally invested. Currency fluctuations may cause the value of underlying investments to go up or down. The Annual Management Charge is levied against the capital property of the Fund which may constrain capital growth. A Key Investor Information Document (KIID) can be obtained by calling the helpline on For security purposes, telephone calls may be monitored or recorded. This brochure is provided for information purposes only and should not be considered as being investment advice.