Strategic Bonds  

Are there alternatives to a strategic bond fund?

This article is part of
Guide to strategic bonds

Are there alternatives to a strategic bond fund?

There are alternatives to strategic bond funds but it would take a sophisticated strategy to mimic some of the exposure the collective nature the sector allows investors to tap into, according to Thomas McMahon, senior analyst at Financial Express.

He says alternatives to using a strategic bond fund include making sure you have an allocation split between the  three main areas of fixed income. 

This, claims Mr McMahon, should give a more stable asset allocation.

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However, he warns there is enough freedom within the gilts, corporate and high-yield sectors for managers to take up significant macroeconomic positioning, so this means investors need to take care that they are aware of the overall exposures of their portfolio to different outcomes.

He says: “It would be possible to pick three separate bond funds all of which were strongly positioned for a [president] Trump reflation trade, for example, which would lead to poor returns if this trade reverts.

“If following this route, investors should do enough research to understand which macroeconomic events and trends they want to be exposed to or hedge out by buying contrasting strategies.”

Fixed income allocation

Ashis Dash, associate director of fixed income strategies at Morningstar, says by allocating to a strategic bond fund, investors hand over some of their responsibility to allocate across fixed income sectors to the fund managers.

He agrees an alternative to a strategic bond fund would be to create a portfolio using a range of specialist funds, with the investor allocating risk across a range of fixed income sub-sectors such as investment grade, high yield, government, emerging market and inflation-linked bonds. 

Mr Dash adds, depending on the sophistication of the investor, they can also use derivative overlays to manage the overall portfolio’s credit beta and duration.

This more granular approach, he claims, ensures the portfolio is diversified and, broadly, has exposure to most of the fixed income sub-sectors.

However, selecting specialist funds within a range of fixed income markets may require considerable resources. Additionally, the investor will also need to move allocations across these funds based on the market environment, which will require a good grasp of macroeconomics and market technicals.

Taking control

Ariel Bezalel, manager of the Jupiter Strategic Bond fund sees the alternative being the ability to invest more specifically.

He notes: “The alternative would be to invest in individual bonds or specific fixed income sectors. Both of these approaches have their advantages and disadvantages.”

By owning individual bonds, Mr Bezalel says the investor has ultimate control over what to buy and sell, when, and for how much. 

“They can buy into a fixed rate of return and calculate their future cash flows based on the bond’s coupon and principal,” he explains.

However this security and control comes at a cost that the investor needs to be aware of.