Strategic bond funds offer a range of objectives to choose from. Here are MM’s five top tips on picking the right fund.
1. Find out if the fund has a ‘pure’ strategic focus. Many strategic bond funds are not purely strategic, investing mainly in corporates or gilts. All the IMA stipulates strategic bonds must hold is 80 per cent of their assets in sterling dominated fixed interest securities. At any one time, the asset allocation of a fund could theoretically place the fund within any of the five other fixed interest sectors.
2. Look at past performance. As with any fund, check how the fund is performing. Look at growth and returns over three or five years and compare to its peers to get a good long-term view of the fund.
3. Is it a global fund? Some strategic bonds may have global mandate. It is worth looking at which bonds the funds are invested in. You may find a fund with a government bond focus could be an investment in a high risk sovereign, adding more risk to your investment.
4. Check the fund is doing what it aims to. Looking at any fund’s objective is key. But strategic bond vehicles are not as straightforward as others. They tend to be very varied and can be across a wide range of different types of bonds.
5. Assess the credit rating focus of the fund. The credit rating in the fund can make it easier to determine how much risk is involved. If the fund is invested predominately in junk bonds (C-rated) or high-yield bonds (BB-rated and below), the fund will theoretically be a higher risk than funds with an investment grade focus (BBB and above rated).
More top tips from Money Management
Take 5: Managing SSAS orphans
Take 5: Investing in alternative assets
Take 5: Assessing capacity for loss
