Aberdeen Strategic Bond Fund seeks flexibility and stability

The London-based head of Aberdeen’s global credit team said the fund, which was launched on 11 March with seed funds of £10m, aims to achieve a long-term total return by investing in a diversified portfolio of global investment and sub-investment grade debt, and debt related securities issued by companies, governments, supranationals and government-related bodies.

With a duration of just under six years, the fund, a UK-domiciled open ended investment company, is currently delivering a 4 per cent yield, which Mr Boulind hopes to increase to more than 7 per cent by using Aberdeen’s “ethos of bottom-up, good, solid, fundamental research”, at both company and sovereign level. The fund also draws on Aberdeen’s regional expertise from around the world.

He said: “Our goal is to take advantage of our global platform for research and preserve capital with a fund which is designed to provide a very robust and stable yield, based on a diversified approach across the globe.

“Clients want exposure to fixed income but have found traditional benchmark-driven investing to be somewhat broken as a process, due to equity valuations and economic growth being pretty abysmal.

“We are seeing some indices at an all-time high and economic growth at lower than 2 per cent. Government bonds on an inflation adjusted basis are insidious over time as it eats away at your overall net worth.”

He added that the fund was a response to client enquiries for a bond which “did something much more on a non-benchmark driven basis” citing a desire to do so in a fund format.

He said: “Our thinking is that as long as growth remains tepid, the developed market governments continue to pursue austerity and central banks continue to pretty much blatantly keep rates low, then a strategic bond fund and in particular, one which is credit-orientated, makes sense.”

The fund has a minimum investment of £500, with a maximum 4.25 per cent initial charge and a 1 per cent annual management charge. Ongoing charges are currently estimated and capped to a maximum 1.13 per cent.

Geographically, the fund is invested between 40-45 per cent in North America, and a further 45 per cent in the UK

and Europe. The balance is invested in emerging markets.

Mr Boulind (whose team includes portfolio managers Rich Smith, Ben Pakenham, Esther Chan, Joanne Gilbert and analyst Khashayar Lotfizadeh), said the fund’s currency mix equated to its geographical breakdown and consisted of high-rated BBB investment-grade assets.

He added: “From a strategic perspective, we ask how do we want to position the fund so that we take advantage of different regions, currencies, interest rate curves, and more importantly for that once in five year event, how do we shut risk down? How do we preserve capital?

“Clients ask for a return and for us to preserve that capital, no-one wants to find out that they have lost 10 per cent of their money in a bond fund, so the idea is it delivers a positive return.

“We can get the returns we need without layering in all sorts of currency risk.

“On a sector basis we are biased towards industrials and have low government exposure, partly because we think there is very little value in the government market, and partly because we think that some of the industrials we have may actually end up being less volatile than government securities.”

With a pro-company approach, the fund invests in senior bonds with national champion banks and selected tier 2 insurance companies. However, Mr Boulind added that his select approach meant that “no one trade drives the portfolio”.

The fund is able to adjust asset allocation across both corporate and government bonds to suit changing and economic market conditions, with a strategic approach to bond management offering a number of benefits for investors, not least the ability to enter a variety of markets and having the ability to increase or reduce exposure to asset classes.

He said: “The fund is definitely dominated by credit at this time, and will probably always have a very strong credit element to it.

“If you are going to be in the fixed income space, the investment grade quality oriented fund sitting on a foundation of credit currently makes a lot of sense because it has positive real yield, and diversity.

“However, as the markets shift, there could be a day when that is not the case.

“For that eventuality, we have designed it in such a way that when the markets require, we are able to make big changes in the fund to protect capital, so it’s a place where robust yield and return is generated from an investment grade foundation but also with a strong eye to preserve capital.

“Ultimately, our fundamental strength is that we can draw on a very good research process.”

On the fund’s performance targets, Mr Boulind, who has worked for Aberdeen for 5 years, said: “We spent a lot of time thinking about them. For every bond in the portfolio we have a target and have an objective of delivering a 5 to 7 per cent return over the next 12 to 18 months – barring a major change in central bank policy. If that happened I think you would earn your coupon.

“It’s a strategic fund, but different in a couple of ways as it relies on our research and expertise, with a company specific, sovereign specific, curve specific approach and from our research we think that it’s a different offering in the strategic space.

“With our research we aim to make it as simple as possible for the investor.”

With sovereign debt, especially in Europe still a “risky” place, Mr Boulind pointed to the current crisis in Cyprus as a reason to look elsewhere for returns.

He added: “We think Cyprus is still a very risky place, and the likelihood that they will need a second bailout is very apparent. It may be an interesting investment opportunity at some point, but it is some way away, and as an economy very small.

“However, if you are comfortable with Greece, there may be opportunities available as the Greek banks are likely to be strong in Cyprus.

“The EU finance group probably did as bad a job as possible in coming up with a bailout package, the idea they were going to vapourise depositors for thousands, speaks a lot about their approach.

“There was a big opportunity to reinforce the monetary union, and they went out and shot it, so it would suggest that the EU don’t know what a lot of the answers are, and with this ham-fisted approach I believe they are a little deaf to the markets and the public.

“This is the problem for the periphery in Europe now, the next risk-off event will worsen the situation, and could lead to bank runs in the next territory being affected.

“The Dutch finance minister claimed this type of bailout would be the template for the future, and that’s a big concern from a portfolio construction perspective, what that means for us is that we follow a fairly conservative path.

“If you look at our portfolios, we are underweight those countries and underweight non-government credit exposure in those countries. Where we have taken risk, it will have been in the national champion, so

for the foreseeable future I can’t see that strategy changing.

“I’d rather take investments in other parts of the world, including government bonds in the emerging markets such as Asia.”

He claimed: “I think that if this fund is managed correctly it can be a very nice part of a portfolio construction for an investor, and it’s challenging from a manager’s point-of-view as you can’t hide behind a benchmark.”

With Mr Boulind’s experience, backed by Aberdeen’s renowned research resources, the fund which has a low management charge and low initial investment threshold may be an ideal vehicle for entering the strategic bond space.