Investment Income CPD Course  

How strategic bond funds fit into a portfolio

  • To understand what is driving strategic bonds.
  • To be able to explain how they work to investors.
  • To ascertain how they work within a portfolio
How strategic bond funds fit into a portfolio

Strategic bond funds are in demand, according to recent figures released by the Investment Assocation (IA), and it seems their popularity shows no signs of abating. 

Fixed income in itself is a particular draw for investors at the moment. The IA’s recently published statistics of UK investor behaviour in December 2017 showed that this was fixed income’s best-selling year and also that it was the best-selling asset class of 2017.

It hit £14.3bn in net retail sales ─ and a significant proportion of sales were in the strategic bond sector. Commenting on fixed income sales for 2017, Alastair Wainwright, fund market specialist at the IA says: “More than half of this went into the strategic bond sector, which attracted £7.5bn from UK retail investors and was the best-selling IA sector.”

In addition, the most recent monthly figures from the IA showed that strategic bonds were the second-best selling IA sector in December 2017. With net retail sales of £333m, only the global sector’s £382m kept them from the top spot. 

So, why are strategic bond funds so popular  – and what is their purpose in an investor’s portfolio?

Back to basics

To understand why strategic bond funds are in demand, it is worth going back to basics, according to Azim Meghji, head of UK fixed income at Santander Asset Management, who says: “Take a look at the reasons why people invest in fixed income in the first place  –  they are looking for a level of income stability and low volatility.” 

But strategic bonds have more to offer. The interest in this current fixed income favourite can perhaps be explained by its flexibility. Strategic bond funds adopt wider investment mandates than traditional fixed interest funds, with managers buying a more diverse range of bonds.  

As Mr Meghji points out: “The beauty of strategic bond funds is that the flexibility they provide allows managers to position the portfolio in the right part of the fixed income asset class ─ the one that they see has value.” 

Iain McGowan, head of fund proposition at Scottish Widows agrees that the flexibility of strategic bonds is an advantage, particularly in the current macroeconomic environment.

He observes: “As there is a degree of political and economic uncertainty in the global economy at present, strategic bond funds have an advantage that they can invest anywhere in global fixed income markets, allowing them to seek out the best investment performance opportunities and avoid problem areas.

"This contrasts with traditional gilt and corporate bond funds which are restricted to investing solely in those parts of the fixed income markets irrespective of whether the outlook is good or poor.”

Steve Bramley, investment director, fixed income at Fidelity International echoes these views, adding: “From a portfolio construction perspective, the appeal of strategic bond funds is that they have a greater level of flexibility than a traditional bond fund and can react to change more quickly.”