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
CPD
Approx.30min

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”.  

Mr Meghji agrees that the category of strategic bond fund can be something of a misnomer, as he adds: “The nature of the strategic bond fund sector is that some strategic bonds are in there because they don’t fit the bond sector as such, but they are not in fact strategic bond funds.” 

He adds: “Also, there is a lot of variety within the sector – some strategic bond funds are macro oriented, some have a bottom-up focus, some have a high-yield bias and others have an investment-grade bias. This can be confusing for the investor.”