Fixed IncomeMay 7 2013

Fund review: Strategic bonds

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As central bank liquidity continues to drive asset prices higher, bond investors need to remain flexible in order to achieve decent returns.

Oliver Boulind, head of global credit and global high yield at Aberdeen, says: “After a 30-year bull run in bonds, many investors are quite rightly questioning their fixed-income exposure. While low yields in many markets don’t match the weak fundamentals, opportunities do remain for investors that have a dynamic and global remit.

“A strategic approach to bond management provides investors with several benefits. It enables investment in a variety of markets and the flexibility to increase or reduce exposure.”

Aberdeen is the latest house to launch a strategic bond fund for the UK retail marketplace. The Aberdeen Strategic Bond fund, announced in March, is managed by the company’s global credit team.

This comes as data from the IMA shows the Sterling Strategic Bond sector to have outsold all other sectors in 2012, recording £2.2bn in net retail sales.

But February also saw outflows of £57m, as the IMA came under fire from the industry to overhaul the sector.

Richard Hodges, manager of the £1.6bn L&G Dynamic Bond trust, told Investment Adviser in March that some funds in the sector aren’t ‘strategic’ and pose a risk.

He questioned: “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?”

Launched in 2008, the sector currently houses 71 constituents and holds 3.6 per cent of the fixed-income funds under management, according to the IMA’s February data. This makes it the second largest fixed-income sector behind Sterling Corporate Bonds, which holds 7.3 per cent of the funds under management.

Ian Spreadbury, portfolio manager of the Fidelity Strategic Bond fund, says the popularity of these funds has increased as investors realise double-digit returns are a thing of the past.

“The double-digit returns we have seen in recent years are behind us. Returns are unlikely to be driven by falling interest rates. However, there is value to be found in corporate bonds and, of course, fixed income should remain an extremely important diversifying component for investors’ portfolios. An active, strategically managed approach to bonds provides me with the flexibility to both avoid unwanted risk concentrations and pursue attractive opportunities,” he says.

When compared against the sector performances of the IMA Sterling High Yield and Corporate Bond sectors, however, the strategic sector, although less volatile than the previous two, does lag behind. Bearing this in mind, it is important advisers take the time to look at the merits of the individual funds before allocating their clients to this sector.

The picks

Templeton Strategic Bond fund