Strategic Bonds  

Strategic options for investment

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Strategic bond funds: the right alternative?

The Jupiter Strategic Bond Fund is one fund I believe merits attention. Managed continuously by Ariel Bezalel since inception in 2008, the fund has outperformed the benchmark (IBOXX UK Sterling Non Gilts), delivering a return of over 100 per cent to date. The fund has an international focus, with the largest allocations in the UK, Asia Pacific and North America, and generates a yield of 4 per cent, largely through exposure to corporate bonds.

Average credit quality is BBB, although the fund invests in a wide range of issues, ranging from AAA to not rated. Offsetting the long holdings, the fund has short positions in Europe and Japan and is set to benefit if yields pick up in these countries from historic lows. 

John Goodall is head of private client research at WH Ireland

Key points 

Strategic bond funds operate under fewer constraints than other types of bond funds.

Strategic bond funds use active as opposed to passive strategies.

Volatility has consistently been the lowest in strategic bond funds.

How to build a strategic bond fund

In building a strategic bond fund, it is first important to form a broad macroeconomic view before even considering portfolio construction. Once in place, this will naturally filter through to the selection of securities and derivatives. We are currently experiencing one of the slowest economic recoveries on record with GDP in the US, the world’s leading economy, having grown at an annualised rate of just 1.2 per cent over the past 10 years.  

However, with the expansion now the third longest on record, nearly double the average length since 1945, it is fair to say we are in the late recovery stage of the economic cycle. Leading indicators do not look broadly positive with, for example, a visibly softer trend in payroll growth and total loan growth dropping to a fresh three-year low with weakness seen across commercial and industrial, real estate and consumer loans.

In a normal environment, one would expect this to be very positive for bonds. However, the role of government intervention cannot be overlooked. Prices of all financial assets, bonds in particular, have been distorted by government buying in recent years.  

As the US Federal Reserve reduces its support and unwinds its balance sheet, there are fears that yields will spike. Although I acknowledge these concerns, the recent experience has been the opposite. Despite the US hiking interest rates, I have actually observed a flattening in the yield curve as investors remain wary about the long-term potential for rate hikes. A combination of high existing debt, ageing demographics and rapid technology growth is likely to weigh on prospects for inflation, keeping interest rates and bond yields at structurally lower rates in the future.