Billions of pounds have been invested in strategic bond funds over the past year, this enthusiasm ensuring it was the best-selling sector in 2017 – and in seven of the past 12 months.
There is now £52.6 billion invested in strategic bond funds – compared to £39.5 billion a year ago, according to statistics compiled by trade body the Investment Association (IA) – and industry observers expect this figure to rise due to ongoing global uncertainty.
There is certainly a lot to like about these funds. Their flexibility to invest in a wide variety of government bonds, investment-grade corporate bonds (bonds with a relatively low risk of default) and high-yield bonds makes them attractive for anyone wanting diversified exposure to fixed income.
Allowing managers of these funds to focus on any part of the bond market they view as attractive enables them to maximise the opportunities, regardless of the backdrop, points out Adrian Lowcock, investment director at multi-manager Architas.
“This makes them particularly useful for individual investors who don’t necessarily have the time or expertise to make informed decisions on how to navigate bonds,” he explains. “The manager of a strategic bond fund will do that for them.”
Given the volatile and uncertain economic, political and stock market outlook, it’s unsurprising that these funds, which can be found in the IA Strategic Bond sector, have grown in popularity over the years. As a result, there is no shortage of choice.
Mr Lowcock suggests the best managers operating in this area will be fairly active and aware of the prevailing environment, with a very flexible mandate that enables them to benefit if there is an increase in either interest rates or company defaults.
“Given the volatile outlook, these funds have grown in popularity”
“They need to combine technical bond knowledge with being able to maintain good stock-picking skills and excellent macro knowledge in order to change portfolios to reflect the changing economic climate and outlook,” he adds.
Stephen Penfold, senior investment manager at Seven Investment Management, believes strategic bond funds could be useful over the next couple of years, with fixed income expected to face challenges on the back of interest rate rises.
“They can act as a safe haven and while we are underweight [in this area of the market], the exposure we do have is spread between US treasuries, European and Japanese government bonds, and emerging markets,” he explains.
He suggests investors focus on quality and look at bonds with a combination of the highest grade fixed income exposure, good diversification, and the lowest equity correlation – even though he accepts this may be easier said than done.
Quick guide: Is this approach right for me?
Consider investing in strategic bonds if…
- You want the fund to invest in all types of fixed income
- You want the manager to have flexibility to decide where to invest
- You expect ongoing global uncertainty
“Remember there’s no such thing as a free lunch, especially since some of these funds may hold a considerable amount in high-yield bonds that carry a certain amount of equity market risk,” he adds. “The higher the potential returns, the higher the potential risk.”
Gavin Haynes, managing director at investment management firm Whitechurch Securities, agrees that strategic bond funds have a role in a well-diversified portfolio, but emphasises they needed to be carefully selected.
“While the environment for bond investing will be more challenging and returns will most likely be more muted, bonds still have a part to play to generate yield and add diversification to a portfolio,” he says.
Mr Haynes adds that the most successful strategic bond fund managers will have to take a flexible approach to continue to find value and manage risk across global markets. He cites Ariel Bezalel, manager of the Jupiter Strategic Bond fund*, as a favoured name.
“His current focus is on a barbell approach (investing in long and short duration bonds) with a core exposure defensively positioned to preserve capital with key positions in US government bonds,” he says. “This is complemented by selective yield plays in bank debt, high yield and emerging market debt.”
There is a lot of choice within the strategic bond fund universe, so investors must do their research to understand the approach the manager is taking, according to Patrick Connolly, a certified financial planner at financial adviser Chase de Vere.
“They can vary considerably in terms of the amount of freedom given to the fund manager, the types of bonds they invest in, where they invest geographically, the number of holdings they have and the term remaining on individual holdings,” he explains.
In theory, strategic bond managers have the best opportunity to succeed when fixed interest in general is performing well, and to protect investors’ money when it’s performing poorly. However, this relies on fund managers making the right calls.
“History shows time and again that many won’t make the right decisions,” he says. “This makes it really important for investors to select the right managers and investment teams and to understand the risks those teams are likely to take.”
Mr Connolly therefore, doesn’t believe having just one such product makes sense. “It’s sensible for investors to hold more than one strategic bond fund and to blend together different manager styles so they don’t have too many eggs in the same basket,” he adds.
* Denotes a Moneywise First 50 fund for beginner investors; see the list at: Moneywise.co.uk/first-50-funds.
Fund to watch: Janus Henderson Strategic Bond fund
The aim of the fund is to provide a return by investing in higher-yielding assets, including high-yield bonds, investment-grade bonds, government bonds, preference shares (where dividends are paid to investors before common stock dividends) and other bonds. It may also invest in equities (company stocks).
The fund, which is designed to be used as one component in a diversified investment portfolio, takes strategic asset allocation calls between countries, asset classes, sectors and credit ratings.
It has 28.9% invested in government bonds, 19.4% in investment-grade non-financial corporate bonds, 18.3% in high-yield non-financial corporate bonds and 13.5% in investment-grade financial corporate bonds, according to the most recent fund factsheet.
As far as its credit rating breakdown is concerned, there is 23.7% in AAA, 22.6% in BBB and 21.3% in BB. The other areas, including AA, A and B each account for less than 10% of assets under management.
Its approach is favoured by Gavin Haynes. “The managers take a dynamic approach,” he says. “They have very robust risk management and this has proved to be a good defensive fund.”
The fund’s managers, John Pattullo and Jenna Barnard, are also co-heads of strategic fixed income. Mr Pattullo joined Henderson in 1997 after four years as a chartered accountant, while Ms Barnard worked as a credit analyst before becoming a portfolio manager in 2004.
Value of £100 invested in the fund over five years
|Fund percentage movement in year (%)||3.92||6.02||1.53||3.68||5.24|
|Value of £100 * (£)||103.92||110.18||111.86||115.97||122.05|
*£100 invested on 1 January 2013. Source: Moneywise.co.uk.
|Manager||John Pattullo, Jenna Barnard|
|Total fund size||2.09 billion|
|Minimum initial investment||Lump sum: £1,000|
|Max intitial charge||4%|
|Ongoing charge||1.4% (inc annual mgmt charge)|
|Contact details for retail investors||Janushenderson.com/ukpi/howtoinvest|
Rob Griffin writes for the Independent, Sunday Telegraph and Daily Express