Asset allocation is a key focus for the £189.3m Aviva Investors Strategic Bond fund, which makes the perception of where we are in the economic cycle very important.
Manager Chris Higham points out: “Bonds can have a wide range of performance depending on where you think you are in the cycle. So high yield bonds, for example, are very highly correlated to equities and economic growth, the flip side being developed market government bonds that tend to do very well when economic growth is declining or low, and the expectations are that interest rates will go down.”
The fund is targeting a total return and in particular aims for top-quartile performance within the IMA Strategic Bond sector.
The process has remained the same since launch. “It is run as a ‘best ideas’ of fixed income strategy, so it is fairly focused in terms of the number of holdings it has and we have an awful lot of conviction in the ideas,” says Mr Higham. “Typically the fund will have roughly 85 holdings – at the moment it is 95 – but it is typically a lot less than the vast majority of bond funds you might look at.”
In addition he notes macroeconomic factors are really key for this fund, along with flexibility in terms of the asset allocation that has changed a lot in the period since launch.
“There have been periods where we had 50 per cent of the fund in government bonds, and times where we had zero,” he says. “Similarly on high yield, probably the highest exposure was roughly 40 per cent and the lowest is below 20 per cent.
“The financials sector is probably the most volatile sector, with peak exposure probably approximately 35 per cent, but the past couple of years it has been roughly 20 per cent. So [there have been] fairly big moves in terms of asset allocation in both government and high yield, but also in the sector positioning.”
For the five years to May 8 the fund has delivered a strong return of 75.47 per cent against the IMA Strategic Bond sector average of 61.56 per cent. Since launch the fund has significantly outperformed the sector average, with a return of 80.12 per cent compared with the sector return of 49.66 per cent, according to FE Analytics.
From a top-down perspective the manager notes the asset allocation took advantage of weakness related to the credit crisis and sovereign debt crisis between 2009 and 2012, with subordinated financials, both banks and insurers, helping to drive performance.
“They were the two big opportunities for us to add credit risk into the portfolio, both investment grade and high yield, and part of that was through subordinated financials.”
However, he admits the one period in which the fund struggled was in August-September 2011, which has dragged on three- and five-year performance, keeping the fund just in the second quartile of the sector.
Mr Higham explains: “That was due to us adding credit risk to the portfolio during the sovereign crisis, and continuing to do that throughout that period. So there is a short period where it underperformed, but I’m really taking a longer-term view of the value of assets, and at that time high yield was yielding double-digit yields and we felt it was something very attractive on a longer-term view.”
Looking ahead, he notes that flexibility is going to be a key focus for fixed income funds and managers to perform well.
“Like last year there will continue to be large divergences in fixed income performances. For example, last year European high yield had returns of more than 10 per cent and emerging market debt was down 10 per cent.
“So even last year, which looked a pretty boring year, the range of returns was still 20 percentage points, so clearly it is pretty important which parts of fixed income you owned and which parts you didn’t own.”
Juliet Schooling Latter, research director, Chelsea Financial Services
Verdict
“This fund aims to give a high return, so the yield is a little low at 3.6 per cent. It invests in bonds globally, but takes very little currency risk by investing mainly in sterling-denominated bonds or hedging back to sterling. That said, when there are opportunities, the manager isn’t afraid to take them. In contrast to his other fund, the manager Chris Higham, has much lower exposure to the high yield end of the market. Performance hasn’t been quite as good as the other funds analysed here, but, it’s held up well and is starting to get on people’s radars.”
