Fixed IncomeJun 29 2015

Top 5/Bottom 5: Sterling Strategic Bond

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Top 5/Bottom 5: Sterling Strategic Bond

Bonds have started to get a bad reputation. Though often viewed as a safe store of capital, their track record has been tarnished in recent years by frustratingly low yield, leading many investors to look elsewhere for higher returns.

Despite recent low yields, some types of bonds still offer long-term value, such as the IA Sterling Strategic Bond sector.

Sterling Strategic Bond funds are those which must invest at least 80 per cent of their assets in sterling-denominated bonds or hedged back to sterling, fixed interest securities, including convertibles, preference shares and permanent interest-bearing shares.

Theoretically, at any point in time the asset allocation of these funds could place the fund in one of the other fixed interest sectors, but the funds will remain in this sector on these occasions since it is the manager’s stated intention to retain the right to invest across the sterling fixed interest credit risk spectrum.

The best performing fund in the sector is the £18.1m Pimco GIS Sterling Long Average Duration fund, which returned just £1,012 , based on a £1,000 initial investment over one year to 29 June according to FE data. Launched in 2004, the fund invests primarily in US fixed interest at 14.7 per cent of asset allocation, though four of its top five largest holdings are UK gilts. The fund manages risk by investing 73 per cent of its assets in AAA-rated bonds, and adds an element of volatility by investing 12 per cent in BBB-rated bonds.

This should be reassuring to Pimco clients, as it was reported that a number of clients withdrew their money from Pimco funds following the departure of fund manager Bill Gross from the company last year.

Natixis Loomis Sayles Strategic Income is currently the worst performing fund in the sector – it saw a drop in performance to £985 over the one year. The £27.3m fund, launched in 2013, invests more broadly than the Pimco fund, with 57.5 per cent of its fixed income asset allocation in the US, 9.6 per cent in Canada, and 2.8 per cent in Portugal. Industrials take up a large proportion of the portfolio at 57.5 per cent, followed by 20.6 per cent in UK Gilts, 13.3 per cent in financials, and the remaining funds in other.

These two funds are at opposite ends of the strategic bond spectrum. The Pimco fund is a more purist fund, investing more heavily in UK gilts, and has delivered better returns. While diversification is often touted as a pillar of a good investment strategy, the Natixis funds is an exception to the rule, as it consistently underperforms the sterling strategic bond benchmark.

Best and Worst Sterling Strategic Bond Funds, 1 Year to 29 June 2015
Best
Pimco GIS UK Sterling Long Average Duration £1,125
SPI Strategic Investment Grade Bond£1,079
City Financial Diversified Fixed Interest£1,075
GAM Star Credit Opportunities£1,074
CF IM Bond£1,069
Bottom 5
Old Mutual Voyager Strategic Bond£981
Old Mutual Monthly Income Bond £979
Pimco GIS Diversified Income Duration Hedged £969
GLG Strategic Bond£965
Natixis Loomis Sayles Strategic Income £954
Figures as at 29 June 2015. Source: FE.

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