The IMA has come under pressure to overhaul its Sterling Strategic Bond sector, after experts warned that some member funds are not ‘strategic’ at all.
Attention has turned to the sector after the IMA recently concluded a review of its Absolute Return sector, which resulted in a name and sector requirements change due to concerns that the term ‘absolute’ could be misleading investors.
The Sterling Strategic Bond sector, which outsold all other sectors in 2012 with £2.2bn net inflows into its funds, has been flagged as the next problem.
Richard Hodges, manager of the £1.6bn L&G Dynamic Bond Trust that is a constituent of the sector, highlighted one rival fund that targeted predominantly UK government bonds rather than investing ‘strategically’ across the bond risk scale.
He said: “What is a fund that tracks the FTSE over 15-year gilt index, and will always be long interest rate [risk], doing in a strategic universe for strategic investors?”
Mr Hodges said internal L&G research on the sector suggested that just eight of its funds were investing across the bond spectrum and using other powers such as going ‘short’ duration.
Peter Toogood, investment services director for Morningstar OBSR, said that it was a problem for advisers that the sector was the “least homogenous” in the IMA universe.
He added that investors needed to closely analyse the sector’s funds on their individual merits rather than relying on sector comparisons, which could be misleading given the disparate nature of member funds.
Examples of funds in the sector that do not explicitly aim to invest across all bond markets include the Pimco GIS UK Sterling Long Average Duration fund, which invests in long-dated gilts. Another example is the UBS Long Dated Corporate Bond UK Plus fund, which is restricted to long duration, as well as the Baillie Gifford Corporate Bond, which does not tend to target government bonds.
When the Strategic Bond sector was first launched in 2008 experts warned that strategic funds were not a replacement for proper financial advice on bond investing.
Craig Veysey, manager of the £62m SPI Strategic Investment Grade Bond fund, said: “All the old high yield funds have ended up in the strategic peer group but they are not strategic bond funds in the way that some investors assume they are.
“They really are just high-yield funds rather than strategic bond funds, often with just a bit of overlay in investment grade.”
Mr Veysey said the IMA should consider housing these funds in a new sector.
The IMA pointed to its ongoing review of the fixed income fund sectors, which was first announced in April last year.
“We’re aware of the points raised. There is currently a fixed income sectors review taking place and we will be communicating to members in due course,” it said in a statement.
UBS said its fund was an institutional product. Pimco did not respond to request for comment.
Fully strategic?
Peter Toogood, investment services director, Morningstar OBSR:
“I do not think that advisers and investors are getting what they think they are with a strategic bond fund sometimes. Some do have specified frameworks where they won’t exceed a certain limit on certain assets. It is the least homogenous sector, you are not comparing like for like.”
