Strategic bond funds, by definition, offer investors exposure to a range of fixed income securities in one investment product – and therein lies their appeal for many who find it challenging to navigate credit markets.
At the moment bond funds in general are being overlooked in favour of multi-asset and absolute return vehicles, as recent figures from the Investment Association show. But nervous investors may want to consider the benefits of strategic bond funds as a way of obtaining fixed income exposure.
Stefan Isaacs, deputy head of retail fixed interest at M&G Investments, acknowledges he has some clients who want to make their own asset allocation decisions in fixed income, “or there might be those that want to defer some of that decision-making to a fund management group”, he says of those who tend to be more suited to investing in strategic bond funds.
Describing the “key levers” managers can pull in these types of funds, Mr Isaacs refers to the interest rate risk run in portfolios.
“That would be one of the principal levers,” he points out. “Where do we want to own interest rate risk? Is that in Europe? The US? The UK? How much interest rate risk do we want to run?
“The other main lever is credit risk and how much exposure do we want to have to corporates. That’s where I think strategic funds are important because they give us flexibility to implement those views for those clients that want us to do that.”
But Kevin Corrigan, head of credit at Lombard Odier Investment Managers, proffers a word of caution about funds that have the ability to go “a little bit anywhere”.
He comments: “Managers can say, ‘We want to be able to go and work wherever we want to because we’re finding it difficult in this area of the fixed income market.’ And that may not always be in the client’s interest because the client may want exposure to one part of the fixed income market and managers say, ‘In order for me to outperform, I need to go elsewhere.’”
Performance data from FE Analytics reveals the IA Sterling Strategic Bond sector generated a modest 1.7 per cent average return in the 12 months to October 29, behind the IA Sterling Corporate Bond sector average of 2.6 per cent.
Aviva Investors’ fixed income fund manager Chris Higham admits: “Fixed income is a very diverse asset class and last year was a good case in point and this year has been [as well]. There will always be certain parts of fixed income that do well and other parts that don’t.”
Identifying those parts of the fixed income market that have been disappointing, he says: “This year most of the attention from a negative perspective has been regarding US high-yield and emerging market bonds. Obviously emerging markets have been in the press and that’s a consequence of the potential US rate hike and dollar strength that we’ve seen. US high yield has been negatively impacted because it has very high exposure to the energy sector.
“[However,] on the positive side, European high-yield returns have been pretty strong this year –around 3.5 per cent for the European high-yield index.”
So strategic bond funds are more suited to investors who want fixed income exposure but aren’t familiar enough with areas of the asset class to invest confidently. Mr Higham concludes: “Strategic bond funds have that flexibility to find the best parts within fixed income and we think that flexibility is key, given the volatile environment we’re in.”
Ellie Duncan is deputy features at Investment Adviser
ADVISER VIEW
Pat Connolly, chartered financial planner, Chase de Vere
“Most people should hold fixed interest in their portfolios to provide protection alongside other riskier investments, such as equities. However, the conventional wisdom of fixed interest being low risk doesn’t necessarily work today. Many fixed interest assets look expensive and might be susceptible to rising interest rates and possible concerns over liquidity.
We still hold fixed interest in client portfolios although we believe that currently the best way to do this is through strategic bond funds. We look for managers who have the flexibility to allocate between different fixed interest assets, which means they can diversify risks and hopefully avoid any future fallout.
The strategic bond sector includes some of the best fixed interest managers and teams. However, the funds in the sector can adopt radically different approaches. It is therefore imperative that adviser firms do the necessary research before deciding where to invest their clients’ money.”
