Fixed Income  

Bond funds with a flexible new twist

This article is part of
Strategic Bonds - February 2015

Strategic bond funds are a fairly new concept for investors, which means that many may be unclear about what they are and how they fit into a portfolio.

According to the Investment Association, the Strategic Bond sector defines these types of funds as having at least 80 per cent invested in sterling-denominated fixed interest securities, with the ability to asset-allocate more of the portfolio to one of the fixed income securities at any point, whether that’s investment grade bonds or corporate bonds.

Chris Higham, manager of the Aviva Investors Strategic Bond fund, notes that investors are drawn to fixed income as a source of income and capital protection but that they have a hugely diverse asset class at their disposal, given the variety of issuers globally.

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He adds: “From the relative safety of government bonds to more adventurous high yield and emerging market bonds, the complex landscape can sometimes prove difficult to navigate. Throw in an ever-changing macroeconomic environment that means no one type of bond outperforms in all market conditions and investors may struggle to stay on top of their asset allocation choices.”

This is where strategic bond funds come in, according to Mr Higham: “The manager of a strategic bond fund can look at the wider macroeconomic environment and strategically tilt the portfolio to those securities that they think will generate attractive returns. They can invest strategically across asset classes and geographically across the fixed income spectrum.”

Stewart Cowley, investment director, fixed income and macro at Old Mutual Global Investors, acknowledges that there is some confusion around this asset class. He explains that there are a couple of groups of strategic bond funds available to investors.

“The strategic bonds sector is basically managers who move between investment grade and high yield in different proportions and they call themselves strategic bonds,” he says. “So they will perform roughly plus or minus in line with the market, depending on the skill of the underlying manager or the index they are being managed to.”

The other group of strategic bond funds are what he refers to as the “go-anywhere guys”: “A sort of go anywhere, total return type of approach, coming at it from a macro perspective. They may or may not be attached to a specific index,” he adds.

Essentially, these types of strategic bond have the ability to go long or short the markets and can have weightings in currencies as well.

“So it’s a kind of mishmash of the lost and the lonely,” Mr Cowley admits. “Investors find it very difficult to find their way through the sector and usually choose on the basis of the reputation of the manager or how the behavioural characteristics of the fund fit into what they’re trying to do.”

When choosing a strategic bond fund for a portfolio, “firstly [you need] to establish what your universe of strategic bonds are – [that] is probably quite important,” says Adrian Hull, senior fixed income product specialist at Kames Capital. “I just encourage people to have a top-down approach and look at currency, look at equity, convertibles. What you’ll tend to see is more volatile funds have more volatile assets in them.”