Last month marked the tenth anniversary of Ian Spreadbury’s £1.6bn Strategic Bond fund. The Fidelity manager reveals that from its launch he wanted the vehicle to have clear objectives as he found other funds in the peer group were “doing lots of different things”.
He recalls: “We felt the fund should have the key attributes that bond investors are looking for – relatively low volatility and low correlation to equities. So it should be a decent equity diversifier and [generate] a reasonable level of income.” He created a “guideline smart benchmark” for the fund, which was to have a mix of 20 per cent in government bonds, 60 per cent in investment grade and 20 per cent in high yield, on the basis that this would give it those attributes.
Mr Spreadbury emphasises that this asset allocation mix is used “fairly loosely”. He explains: “It’s a question of what we’re seeing in terms of fundamentals at the stock level, and valuations are probably the biggest input into the allocations and how we pick stocks. We tend to be very bottom up at Fidelity, so a lot is driven by what we’re seeing at the bond level.”
He draws on the expertise of the group’s credit team, quantitative analysts and the trading desk and legal team. He acknowledges that running a fund with a global remit means he cannot ignore the macro environment, while what is going on at the sovereign level is important to investing in government bonds. On the basis that there is a very high level of global debt, he notes: “I’m sticking generally to high-conviction credits, whether it be within high yield, emerging markets or in investment-grade credits. I’m trying to focus on high-conviction areas and that’s my hedge against what could be a manifestation of systemic risk at some point.”
The manager describes his personal style as “more of a gradual process”, rather than making big changes to the portfolio. He explains: “In the past year in the broader allocation level in the portfolio, I’ve had about 30 per cent in high yield and I’m still around that level, which is a little bit higher than what I would consider to be a long-term average of about 20 per cent.
“The bulk of the portfolio remains in investment grade at 50 per cent or so. The balance – 20 per cent – is in government [bonds], including about 6 per cent in inflation-linked [bonds]. You might ask: ‘You’re not in the inflation camp, why would you invest in inflation linked?’ Because real yields are driven by the outlook for real growth, which I think is quite poor, and so growth has disappointed and I think it’s more likely to continue to disappoint.
“Some of my best performers in the past year have been inflation linked, even though inflation has surprised on the downside,” he adds.
The ongoing charges for the Y-accumulation clean retail share class are 0.68 per cent, while the fund sits at just level three on a risk-reward spectrum, making it low risk.