"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.”
Diversifying
Spreading risk is a factor too, as Bryn Jones, head of fixed income at Rathbones, points out: “The reason to have a strategic bond fund in your portfolio is that it is a diversifying asset.”
And they have another plus point, as Kelly Prior, investment manager at BMO Global Asset Management, explains: “The advantage of strategic bond funds is that you can get exposure to lots of different assets – and there are some jewels in there.”
Strategic bond funds have their disadvantages too, however, as Mel Kenny, financial adviser at Radcliffe and Newlands points out: “The advantages of strategic bond funds are that they devolve the responsibility of putting together a suitable composition of bonds commensurate with the economic environment.”
But this comes at a price, as he adds: “This means higher fund management charges, as the fund manager has to be paid to make some big decisions. And of course, despite being paid handsomely, fund managers don’t always get it right.”
Comparing strategic bond funds
Strategic bond funds clearly offer a range of positive attributes, but it is not always a straightforward exercise for investors to compare them, to make an informed decision. However, reviewing performance figures is a good place to start, according to Mr McGowan.
He says: “The first step in comparing strategic bond funds is to compare their performance over as long a period as possible.
"This should highlight which managers use the investment flexibility that strategic bond funds possess to protect investors’ returns in difficult market conditions, and exploit investment opportunities when conditions are more favourable.
"Reading past fund commentaries and watching manager interviews online can also provide valuable insights."
However, it is worth bearing in mind the risk of not comparing like with like, as the variety of strategic bond funds available can potentially create challenges, as Mr Jones cautions: “This is a very diverse sector and some strategic bond funds are in it just because they don’t fit into other sectors”.
