Your IndustryOct 30 2014

Part played by ‘strategic’ bonds in a portfolio

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Carl Lamb, managing director at Almary Green, says there are two schools of thought on what part a strategic bond fund should play in an investor’s portfolio.

The first school is that a strategic bond fund can be a single holding to provide fixed interest exposure, while the second is that they are better suited to be core holdings, around which specialist satellite funds can be arranged.

He says this will depend very much upon the specific fund or funds used.

Gill Hutchison, head of investment research at City Financial, says the sector features funds for many types of investors, from conservative to adventurous, income-seeking to total return-driven.

More conservatively managed strategic bond funds might be held comfortably as a central part of a fixed income allocation, Ms Hutchison says.

She says: “More aggressively managed strategic bond funds, and/or those with a strong bias to high yield, would be more appropriate for investors with a higher tolerance for risk and a longer investment time horizon.

“Once again, an understanding of individual funds is extremely important.”

If at broad level, your client is looking for about 20 per cent of their portfolio to be in fixed income then Karthica Underwood, Chartered Financial Planner of Principal Financial Planning, says it may be appropriate to use a strategic bond fund.

If, however, your client wants to have control over the proportions invested into the different areas of fixed income then Ms Underwood says you need to consider whether the asset allocation of these funds matches this or will continue to do so.

Another good reason to invest in strategic bond funds is to diversify a share-based portfolio, says Stuart Rumble, investment director for fixed income at Fidelity Worldwide Investment.

Mr Rumble says: “They tend to perform differently at varying times and so holding them together can help smooth overall returns.

“The exception is high yield bonds which, at times, do behave more like equities. For this reason, some strategic bond funds limit the amount they invest in high yield bonds.”