Since launch in February 2009, the £103.1m Standard Life Investments (SLI) Strategic Bond fund has underperformed the IMA Sterling Strategic Bond sector average, prompting a change in its mandate.
The change was made in August 2011 and its figures for both 2011 and 2012 suggests a turnaround in performance, bettering the sector average by 1.59 percentage points.
The SLI Strategic Bond fund is run by four managers led by Andrew Sutherland and started with an almost institutional mandate of a 50/50 split between gilts and corporate bonds.
However “from August 2011 onwards we have run it with a much more flexible mandate structure, which is more appropriate to the peer group,” says Mr Sutherland. “We had to revise our ideas about it now the peer group has kind of settled down. So we’re much more flexible.”
The other three members of the team include David Ennett, whose background is in high yield, Sebastian McKay, who has expertise on the government bond side and Roger Sudeski, who moved from credit to multi-asset but remains in the strategic bond team.
Mr Sutherland explains: “We obviously confer on a daily basis and we have a monthly meeting to go over the monthly strategy. It works quite well – we have to develop a consensus for the biggest position trades, and that has stood us in good stead so far.
“We want to be in the best performing areas in fixed income – but, within that, we want to have low volatility. So against the peer group, in the shorter term performance ranges, we can be anywhere really, but medium to longer term we want to be top quartile. That’s the goal.”
Mr Sutherland points out the main components of the fund are government bonds, high yield and investment grade, with a minimum of 20 per cent of the fund in each of those areas.
But he notes: “At the moment we would be getting down towards 20 per cent in investment grade; we’re at 20 per cent in government bonds as well and we’ve got roughly 50 per cent in high yield and some in emerging market bonds. At the moment we’re reasonably disposed to a risk-type environment.”
Since launch the fund has produced a cumulative return of 47.2 per cent compared with the sector average of 62.85 per cent, according to Morningstar, although the discrete performance has seen the fund outperform the sector in 2011 and 2012. Last year the fund returned 15.42 per cent compared with the IMA Sterling Strategic Bond sector average of 13.83 per cent.
Mr Sutherland notes: “In the past six to 12 months we’ve been increasing the high-yield component and reducing the investment-grade component.
“The other important thing is that at the start of 2013 we took duration down to three [years] – duration had been slightly higher than that.”
The fund also utilises an overlay to provide volatility-reducing type trades. Mr Sutherland explains this would typically include single name pair trades in corporate credit default swaps, which would give good returns if there were an occurrence of an event such as a blow up in the Chinese economy.
“We continue to do trades like that, which has helped to reduce volatility. The overlay contributed something like 49 basis points to performance over 2012.”
Mr Sutherland notes that with government bond allocation, the team has diversified out of the UK almost completely over concerns about the political environment and the potential for downgrades. The managers have instead moved into perceived safer markets such as Norway, Canada, Germany and Australia.
“In the investment-grade portfolio we’ve managed to maintain an overweight exposure to financials, which have benefited from moves in peripheral Europe. We’ve also had exposure to some of the peripheral corporates, such as Telecom Italia and Telefónica,” says the manager.
While not yet at its five-year anniversary, a more flexible mandate and a focus on longer term consistency rather than short-term performance, makes this an interesting option to watch.
Expert view
Juliet Schooling-Latter, research director at Chelsea Financial Services:
“This fund aims to provide both capital return and income and has achieved that aim since its launch, with a yield of almost 4 per cent and steady mid-table returns that have led to first-quartile figures spanning three years. It currently has a reasonably high weighting to corporate high yield (about 40 per cent plus), with most holdings in the BB to BBB crossover area. The manager expects returns from investment-grade corporate bonds to remain low so is looking to increase holdings, such as emerging market local currency inflation-linked bonds, which have proved successful in recent weeks.”
