The £155.1m Standard Life Investments Strategic Bond fund was launched in February 2009 with the aim of providing a competitive total return from income and capital growth against its peer group, the Investment Association (IA) Sterling Strategic Bond sector.
Daniel McKernan, head of sterling investment-grade credit at SLI and co-manager of the fund, explains: “The fund is set up to have no real reference benchmark or any sort of bias. We’re trying to provide a truly global best-ideas fund, so we can invest in euros, sterling, dollars, investment grade, high yield, and also in government [bonds] and inflation and emerging markets [debt].”
Managed by a team of four, which also includes Mark Munro (investment director for credit), David Ennett and Sebastian McKay, Mr McKernan notes the different backgrounds of each manager brings distinct views and approaches to the portfolio.
“A few years ago the fund was run in almost individual pots [but] we have changed that slightly so we take a much more holistic… view. That sits nicely with not having a reference benchmark and looking at things much more on a risk-budget basis,” says the manager.
“So we can put some of the ideas that are appropriate from Gars [global absolute return strategies] into the fund, it also means Seb McKay, who sits in the multi-asset team, is free to throw in those ideas and we can chat about them as a team. It is best ideas, so stockpicking is extremely important to us, and really trying to find those [ideas] on a global basis.”
Mr Munro adds that while the credit team focuses on bottom-up research, “we don’t operate in isolation and some of the macro factors are still important to us”.
He explains: “Depending on our view and valuations and the wider macro, that will determine the overall risk profile of the portfolio. [This] allows us to put our best positions in the fund but then we still need to be able to weight them in a way we can dial up or dial down the risk.”
For example, he points out the multi-asset side produces a lot of macro insights, which are relevant for the amount of duration the fund will take and where it will place it.
“We have been very active in duration and at the end of last year/start of this year we added the best part of a year of duration back into the fund. So it has just under five years duration. That was on a view that disinflationary pressures, with the fall in oil and other commodities, would take longer to play out and is not a short-term phenomenon.
“But we have been quite nuanced in how we are taking duration. We’ve not just piled into the UK, we have put it back into Canada and also mainly into Europe through Germany, through longer-dated German bunds.”
The fund’s platform one accumulation share class, which has a risk-reward level of three out of seven and ongoing charges of 0.81 per cent, has delivered consistent performance, beating its IA peer group across three and five years.
Its five-year return of 39.98 per cent is just ahead of the IA Sterling Strategic Bond sector average of 32.78 per cent to April 30, according to FE Analytics data.
Shorter-term performance has been a bit weaker, as Mr Munro notes that in 2014 “we gave a little bit of performance back as we remained cautious on government bond yield levels”, noting that the fall in government bond yields last year “caught us a bit by surprise and with retrospect [we] could have done with a bit more duration”.
But he adds the team will not change their views based on very short-term views, as he says the managers consider “three to five years is still the right profile for this point in the cycle where valuations are”.
Meanwhile, a more recent change has been to “put a little bit of protection on to the portfolio through crossover, which is a default swap index, as a way of taking out some of our high-yield exposure and risk”.
He explains: “The reason we’ve put that on is a short-term view round the Greek situation and also the secondary factor is the UK general election.”
EXPERT VIEW
Jake Moeller, head of Lipper UK & Ireland research, Thomson Reuters
Standard Life has built up some formidable intellectual capital and its hiring of Messrs McKernan and Munro from Swip certainly bolstered the ranks. This fund has seen a number of iterations throughout its history but now seems to be settled on an emphasis on sterling credit and high yield in particular. While low default rates prevail, this fund will do well – and the multitude of scenario-testing SLI undertakes should mean a reasonably nimble asset allocation change if the environment alters.
