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Moving up the risk curve



    However, government and central bank policies of quantitative easing have made conventional funds less attractive, so many bond fund managers have started to diversify across the range of fixed income, and bring in new ideas.

    Strategic bond funds allow fund managers to branch out of their usual constraints and try a more complex mix of fixed-income products. This may involve moving up the risk curve and buying in and out of high-yield bonds, adjusting their portfolios when necessary.

    These bond funds allow managers to use derivatives as well as riskier bond products to achieve the return they need, but the challenge remains for many managers to get the balance right to suit their investment goals.

    One of the difficulties on the horizon is the question of rising interest rates. An increase in base rates is bad news for bond fund managers, and while the Bank of England grapples with the prospect of deflation this challenge does not look like appearing immediately, but still remains a threat in the not too distant future.

    Many strategic bond fund managers have attempted to plan for this by investing in shorter-duration bonds, although they could suffer if interest rates do not actually rise.

    Despite all their flexibility and supposed superiority over conventional fixed-income funds, strategic bond funds have returned 35.7 per cent over the past five years, against the top-performing UK Smaller companies sector – a return of 98.3 per cent.

    However, it remains popular with investors looking to move up the risk curve and get away from equities.

    Melanie Tringham is features editor of Financial Adviser

    In this special report


    Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

    1. What factor has increased the amount of risk in bonds asset class?

    2. According to the Investment Association, what proportion of a strategic bond fund must be invested in fixed interest securities?

    3. According to the Investment Association, what will keep a fund in the streategic bond sector?

    4. Which of the following can NOT be held in a strategic bond fund?

    5. How have strategic bond managers prepared for rising interest rates?

    6. How much has the sterling strategic bond sector returned over the past five years?

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