Twice each year, FE fundinfo, the global fund data and technology company, publishes its crown ratings.
Applied to funds with three or more years of history, the ratings aim to provide investors with greater transparency when it comes to fund selection.
The ratings are calculated in three parts, with each fund’s score referenced to a benchmark.
Once the benchmark is assigned, three tests are then applied – an alpha-based test, a volatility score and a consistency score – to the total return history of the fund.
Funds are then assigned ratings on their total scores, with the top 10 per cent awarded the highest five-crown rating, with the next 15 per cent awarded with four crowns and then each subsequent 25 per cent being awarded three, two and one crown respectively.
More than 3,500 funds are analysed at each rebalance, so the research provides some great insight into how funds are performing.
Having just published its first rebalance for 2020, it was interesting to see that once again the Investment Association Sterling Strategic Bond sector has outperformed its sector peers, with 27 out of its 85 funds – 31.8 per cent – being awarded with the highest five-crown rating.
This follows on from its strong performance in July last year, where 26 funds gained the accolade.
The sector is an interesting one in that its constituent funds must invest at least 80 per cent of their assets in sterling-denominated (or hedged back to sterling) fixed interest securities to qualify.
This includes convertibles, preference shares and permanent interest-bearing shares.
There is therefore a lot of scope to choose a strategy for almost every stage of the investment cycle and almost every type of investor.
Funds
The sector saw two of its funds without a prior three-year history being awarded with a five-crown rating. These were both from Tideway Investment for their Tideway GBP Credit and Tideway GBP Hybrid Capital Bond funds – both launched in August 2016.
Since then, both have enjoyed strong performance, returning 15.31 per cent and 28.19 per cent by the end of 2019 respectively, both outperforming the sector as a whole.
Each aims to generate income at low to medium volatility for investors either at up to five years (Tideway GBP Credit) and more than five years (Tideway GBP Hybrid Capital Bond).
Their performance has been underpinned by their heavy concentrations in the insurance sector, which has broadly seen a steady year.
Best and worst performers
While the sector itself has generated returns of 9.26 per cent over the past year, some of its star performers (other than Tideway GBP Hybrid Capital, which tops the sector) have exceeded that return.
Quilter Investors Diversified Bond, which has been the second best performer over the past year, saw similar returns of 15.48 per cent, rising steadily throughout the last quarter of 2019 thanks to a high allocation to bonds issued by banks, while Nomura’s Global Dynamic Bond saw returns of 15.18 per cent, principally by investing in a broad range of debt securities.
The fund uses both cash bonds and fixed income-related derivatives to dynamically adjust strategic positions relating to shorter-term market movements.
Meanwhile, the sector’s ‘worst’ performers over the past year have also enjoyed positive returns.
HC’s Charteris Strategic Bond, M&G’s UK Inflation Linked Corporate Bond and Invesco’s Tactical Bond fund saw positive returns of 0.85, 3.80 and 4.59 per cent respectively.
These funds have limited their duration bet, which was the wrong place to be last year.
This year promises more uncertainty, both economically and politically. Naturally, strategic bond managers are not insulated against these pressures.
As ever, when it comes to fund selection it remains important to maintain a diversified shortlist of strategic bond funds and managers.
Charles Younes is research manager at FE Investments
