What role can strategic bonds play in an investor's portfolio?

Thomas McMahon, senior analyst at Financial Express says a mainstream strategic bond fund could work as a single fixed income allocation for an investor.

“Although the investor will need to be made aware that most such funds are likely to make quite significant moves between sectors. This means the investor will be less exposed to a steady strategic asset allocation and will be taking a risk that the manager will make the wrong moves,” he notes.

A strategic bond fund may also work as a tactical part of a more inclusive fixed income allocation.

Mr McMahon says: “An investor may want to buy specialist gilt, investment grade corporate and high-yield bond funds which will remain constantly invested in their asset class.

“This means they would then use a strategic bond fund to allow a preferred active manager to tilt the exposure one way or the other, so the active decisions are smaller proportionate to the size of the fixed income exposure.”

Ashis Dash, associate director of fixed income strategies at Morningstar believes strategic bond funds are generally best used as supporting or satellite vehicles.

He suggests: “While we often dub strategic bonds a ‘one stop shop’ they should not always be considered that way.”

Mr Dash says that investors trying to gain a diversified exposure to fixed income markets may need to take a more specific approach.

Investment style

He believes it’s important for those considering an investment in a strategic bond fund to have an understanding of, and comfort with, each fund's investment style, given that nearly all have somewhat different risk profiles. 

He adds: “Investors should also be aware that the active management of a fund’s credit, rates and currency exposures, in response to the market environment, can lead to varying risk-return characteristics over an economic cycle.

“Thus, investors shouldn’t simply see these as a replacement for more traditional investment grade or government bond funds. The latter’s embedded duration can often provide the single most effective portfolio ballast when market shocks lead to extreme correlations.”

Ariel Bezalel, manager of the Jupiter Strategic Bond fund agrees the use of strategic bonds very much depends on each investor’s individual portfolio and their goals, as well as the particular strategic bond fund itself. 

Strategic bond funds which are more heavily positioned towards high yield and emerging market debt might be a suitable diversifier to gain exposure to the potentially higher returns of these markets.Ariel Bezalel

This is because despite differences in approach, strategic bond funds tend to be very versatile and aim to identify and benefit from the most attractive fixed income opportunities available globally. 

As such, a strategic bond fund could be used as a core fixed income holding for investors seeking to gain broad, diversified bond market exposure.

Mr Bezalel adds : "Other investors may want to gain further diversification in addition to their existing fixed income holdings. In this case, strategic bond funds which are more heavily positioned towards high yield and emerging market debt might be a suitable diversifier to gain exposure to the potentially higher returns of these markets, provided they are comfortable with the additional risk.”

samantha.downes@ft.com