Introduction
Enter strategic bond funds, which can pick and choose from the fixed income universe, meaning they should produce returns somewhere between those generated by corporate bond funds and the returns from high-yield funds.
Over a three-year period to April 21 2016, the performance of the Investment Association (IA) Sterling Strategic Bond sector puts it in the middle of the other two bond fund sectors, having delivered an average 8.1 per cent to investors. As expected, the IA Sterling Corporate Bond sector average return is slightly ahead at 9.5 per cent, while the Sterling High Yield sector only just lags, delivering an 8 per cent return.
The sector definition states strategic bond funds must invest at least 80 per cent of their assets in sterling denominated fixed interest securities, and 83 funds of this type are in the sector.
One-year returns from the three bond sectors show the past 12 months has been a more challenging time for strategic bond fund managers, with the average return from the sector trailing both the corporate fund sector and the high yield sector average. In the past 12 months to April 21, the IA Sterling Strategic Bond sector returned a negative 1.1 per cent, FE Analytics shows.
| FUND PICKS |
Santander Strategic Bond This fund remains £21m in size despite having launched in 2009. It underwent a restructuring and came under the management of the UK fixed income team, managed by Azim Meghji, at the end of June 2014. He can invest across the sterling fixed interest credit risk spectrum, including government bonds, investment grade bonds, high yield bonds and convertibles. Over three years to April 20 2016, the fund generated 10 per cent for investors, beating the IA Sterling Strategic Bond sector average of 8 per cent, according to FE Analytics. In the past 12 months, the fund’s performance is in negative territory, down 1 per cent while the sector generated an average 1.2 per cent loss. Jupiter Strategic Bond Jupiter’s Ariel Bezalel has managed this £2.6bn fund since launch in June 2008. The aim is to achieve a high income with capital growth by seeking out the “best opportunities” in the fixed income universe globally. Mr Bezalel invests in higher yielding assets, including high yield bonds, investment grade bonds, government bonds, preference shares and convertible bonds. Over five years, the fund has delivered 33.2 per cent to investors, outperforming the IA sector average of 25.6 per cent. The portfolio has 63.7 per cent in corporate bonds, with a 33.2 per cent weighting to government bonds. EDITOR’S PICK Axa Sterling Strategic Bond This fund has clocked up several years of consistent returns and is managed by experienced fixed income investor Nick Hayes, who joined Axa IM in June 2010. Its objective is to provide an income combined with any capital growth in excess of the market for sterling denominated investment grade bonds. The £242m fund has delivered 34.8 per cent over five years to April 20, outperforming the sector average of 25.6 per cent. In the past year the fund has returned 1.3 per cent. |
So, what must strategic bond managers contend with? Aside from the low interest rate environment, the referendum on Britain’s membership of the EU, which takes place on June 23, is a major headwind.
Ariel Bezalel, manager of the Jupiter Strategic Bond fund, commented at the end of March: “For much of February. UK assets were under pressure as investor sentiment towards the UK turned negative on fears of a Brexit. Since then, we have seen something of a rally – risk has been back in vogue as investors have realised that UK corporates are in good shape.”
His concerns about the referendum centre around the political fallout in a scenario where Britain votes to leave the EU.
Mr Bezalel confirms he still likes the UK though, and reasons: “Firstly, we believe monetary policy is likely to remain loose for some time. In fact, the market currently expects no rate rise in the UK until late next year. Secondly, the UK economy is in relatively robust shape and has outperformed many of its peers globally.”
John Godley, co-manager of the Sarasin Sterling Bond fund, also provides reassurance to strategic bond investors, suggesting the Bank of England’s Monetary Policy Committee is ready to provide adequate liquidity to the money markets around the time of the vote.
He acknowledges: “A vote to leave could see short-term volatility in the gilt market, but the long-term implications are unclear as international capital flight can be easily combated with further QE.
“The uncertainty of the event appears to have already weighed on economic growth, and interest rate hikes, which would negatively impact the gilt market, seem a distant prospect. UK- and Europe-domiciled corporate bonds would likely suffer, though we believe the investment-grade companies in which we invest will be able to weather the storm.”
He adds the “steady, but uninspiring” UK economy will keep gilt yields “range bound”.
