How strategic bond funds fit into a portfolio

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.” 

And there is yet another layer of complexity which emerges when seeking to compare strategic bond funds, particularly when looking at performance – they don’t have the same longevity, as Mr Bramley highlights: “Investors should bear in mind that some strategic bond funds have not yet been invested over a full market cycle.

"Some were launched in the last five years, for example, so were not tested in the credit crunch of 2008 as some other funds were.” 

If investors can understand how multi-asset funds work, they will also grasp the concept of strategic bond funds. Mr McGowan

A solution, as Mr Jones proposes, is to look beyond the numbers: “To compare strategic bond funds, don’t just look at performance – look at risks and volatility, and look for a good Sharpe ratio and low correlations with equities and gilt markets. In other words, focus on the right risk metrics, not just the best returns.”

The investor also needs to be very clear about what they are comparing, emphasises Ms Prior, who says: “There is no substitute for investors doing the work to understand the detail of what they are investing in.

"Looking at performance numbers is not enough. Investors tend to try to extrapolate the future from the past, but you can’t use the numbers to understand the composition of the funds.” 

Mr Bramley agrees: “It is of paramount importance that investors do their due diligence on these funds. We advise them to take a good ‘look under the bonnet’”. 

How complicated are strategic bonds?

Bearing in mind that there may be some scope for confusion among investors with regard to strategic bond funds, could this mean that they are in fact just too complex for the average investor? 

Darius McDermott, managing director of Chelsea Financial Services, sees potential for investor confusion, as he says: “Fixed income is a huge asset class and can in itself be hard for investors to assess, what with the range of products available, such as government bonds, corporate bonds, emerging market debt, floating rate notes and convertible bonds to name but a few.