Asset allocation is a key focus for the £189.3m Aviva Investors Strategic Bond fund, which makes the perception of where we are in the economic cycle very important.
Manager Chris Higham points out: “Bonds can have a wide range of performance depending on where you think you are in the cycle. So high yield bonds, for example, are very highly correlated to equities and economic growth, the flip side being developed market government bonds that tend to do very well when economic growth is declining or low, and the expectations are that interest rates will go down.”
The fund is targeting a total return and in particular aims for top-quartile performance within the IMA Strategic Bond sector.
The process has remained the same since launch. “It is run as a ‘best ideas’ of fixed income strategy, so it is fairly focused in terms of the number of holdings it has and we have an awful lot of conviction in the ideas,” says Mr Higham. “Typically the fund will have roughly 85 holdings – at the moment it is 95 – but it is typically a lot less than the vast majority of bond funds you might look at.”
In addition he notes macroeconomic factors are really key for this fund, along with flexibility in terms of the asset allocation that has changed a lot in the period since launch.
“There have been periods where we had 50 per cent of the fund in government bonds, and times where we had zero,” he says. “Similarly on high yield, probably the highest exposure was roughly 40 per cent and the lowest is below 20 per cent.
“The financials sector is probably the most volatile sector, with peak exposure probably approximately 35 per cent, but the past couple of years it has been roughly 20 per cent. So [there have been] fairly big moves in terms of asset allocation in both government and high yield, but also in the sector positioning.”
For the five years to May 8 the fund has delivered a strong return of 75.47 per cent against the IMA Strategic Bond sector average of 61.56 per cent. Since launch the fund has significantly outperformed the sector average, with a return of 80.12 per cent compared with the sector return of 49.66 per cent, according to FE Analytics.
From a top-down perspective the manager notes the asset allocation took advantage of weakness related to the credit crisis and sovereign debt crisis between 2009 and 2012, with subordinated financials, both banks and insurers, helping to drive performance.
