Fund buyers have begun shunning strategic bond funds due to concerns over their exposure to the high-yield market, with some questioning the funds’ ability to navigate their way past fixed income risks.
High-yield debt has been under pressure over the past year as signs emerged of a potential turn in the US credit cycle. Selectors seeking to reduce exposure have found reason to cut holdings in strategic bond funds, too.
Tilney Bestinvest director of investment strategy Ben Seager-Scott said he had closed out all high-yield exposure in his multi-asset portfolios, and shifted strategic bond exposure into gilts and US treasuries.
“This is very much an asset allocation call, as we look to reduce our high-yield exposure, even on a see-through basis, to minimal levels in most of our portfolios,” he said.
Strategic bond funds are designed to provide flexible exposure to fixed income but the reach for yield has meant many have loaded up on high-yield debt.
The average fund in the sector had 40 per cent in high-yield debt as of December 31, according to Investment Adviser analysis. But that month saw a further souring of sentiment on high yield after US firm Third Avenue’s decision to suspend its $788m (£544m) Focused Credit fund sent judders through the market.
Harwood Multi-Manager chief investment officer Richard Philbin queried strategic bond funds’ ability to withstand these moves.
“I do have a lot of questions around strategic bond funds,” he said. “The vast majority of managers do not swing the bat and make it strategic. They have a big exposure to a sector, industry or credit and just leave it that way.”
Popular bond fund houses have also noticed the change in approach. Kames Capital director of wholesale Steve Kenny said the firm’s Investment Grade Bond fund enjoyed its best monthly inflows for half a year in January. He added flows into its Strategic Bond fund vehicle had slowed but were still positive.
Positions in the latter fund and M&G Optimal Income, the largest in the IA £ Strategic Bond sector, were closed out by Mr Seager-Scott in January. He transferred the positions to sovereign bond passives of varying durations. Mr Philbin, meanwhile, said the Kames IG Bond fund was attracting his interest.
The shifts have found favour elsewhere. Jonathan Bell, chief investment officer at Stanhope Capital, said: “Given the huge dispersion in yields, I am not surprised that holders of bond funds are preferring to invest in single-strategy funds where they have a greater control of the risks being taken on their behalf.”
But Jim Wood-Smith, director of research at Hawksmoor, suggested opting to buy single strategies was a risky move. “If you are going down a single bond strategy, it is because you believe you can do bond allocation better, which is a brave call,” he said.
