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Fund Review: Strategic Bond funds


Now that the severe winter has been identified as the culprit, the question is how the US will continue to perform.

There is also uncertainty on China’s pace of growth, while the political tensions between Russia and Ukraine threaten to destabilise a nascent European recovery.

It is against this backdrop that strategic bond funds are expected to perform. The IMA Strategic Bond sector was the best-selling IMA sector in 2012, having been the best-selling of the sectors in the third quarter of that year as investors moved from buying the IMA Corporate Bond sector in the second quarter of 2012.

According to FE Analytics, the IMA Sterling Strategic Bond sector has delivered modest returns over three and five years of 19.46 per cent and 62.17 per cent respectively to May 8 2014. However, performance in the six months to May 8 2014 dropped to 3.18 per cent.

But St James’s Place Wealth Management points to improving second-quarter data for the US, with 288,000 jobs created in April and unemployment down to 6.3 per cent. Meanwhile, according to its commentary, Axa IM’s chief economist Eric Chaney claims the weak growth at the start of 2014 followed by a second quarter “rebound” will give a further boost to equities and bonds.

Ariel Bezalel, manager of the Jupiter Strategic Bond fund, believes many of the reasons behind the performance of credit last year are still in place in 2014. He points to the “still very dovish” European Central Bank.

He adds: “You do still have an ongoing focus on paying down debt by companies. In the US I think this is changing a lot, where corporates are more and more focused on shareholder returns, and that typically leads to higher dividend payouts, more M&A activity – things that can basically increase leverage on corporate balance sheets.”

Mr Bezalel warns that while this could lead to the underperformance of corporate bonds in the US, in Europe the ongoing paying down of debt should see corporate bonds perform.

He observes that while spreads are currently tight, there are a couple of situations that could cause them to widen, including the worsening of the Ukraine/Russia tension, and if China disappoints.

In the current low interest rate environment, Russ Koesterich, BlackRock’s global chief investment strategist, warns investors are “at risk” of stretching too far for yield, although he acknowledges there are few “genuine bargains”. He says there is still value in mortgage-backed securities, while those “hungry for additional yield” should look to high yield bonds.

For investors, there is outperformance to be found in strategic bond funds, in spite of the uncertainty in global credit markets.


Henderson Strategic Bond fund

Co-managed by John Pattullo and Jenna Barnard, this £1bn Strategic Bond fund from Henderson Global Investors aims to provide a return by investing in higher yielding assets, including high yield bonds, investment grade bonds and government bonds. The managers run several fixed income funds for Henderson and have been running funds together since Ms Barnard was recruited in 2002. The fund has delivered a top-quartile performance for the 10 years to May 9 2014 of 84.41 per cent, with performance dropping to second quartile in the IMA Sterling Strategic Bond sector across five years.

Kames Strategic Bond fund

David Roberts and Philip Milburn are co-managers of the £683.2m Kames Strategic Bond fund. Its objective is to maximise total return by investing in global debt instruments denominated in any currency. At least 80 per cent of the portfolio will be invested in sterling and other currency-denominated bonds hedged back to sterling. The fund may also invest in deposits and money market instruments. According to FE Analytics the fund is top quartile for the 10 years to May 9 2014, having delivered an 80.23 per cent return. It is second quartile across one and five years.


Artemis High Income fund

This £909.3m fund represents the high income sub-sector of the IMA Sterling Strategic Bond sector. It is also an Investment Adviser 100 Club 2013 fund thanks to its top-quartile performance across one, three, five and 10 years. The fund is managed by Adrian Frost, who has been at the helm since 2002, alongside Adrian Gosden and Alex Ralph. The aim is to achieve an above-average income with some longer term capital growth. It has returned 104.82 per cent for the 10 years to May 9 2014, against the IMA Sterling Strategic Bond sector average of 62.84 per cent.

In this special report