In focus
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“High yield has been a
popular bias in recent years
because it tends to be more
correlated to equities, which
have done very well”
The return of volatility last year and the desynchronisation of asset
classes could offer strategic bond fund managers a chance to
demonstrate their skill, writes Holly Black
Time to shine
I
n theory, a strategic bond fund
seems like the perfect choice for
investors looking for exposure
to fixed income. These vehicles
mean you can leave it to the manager
to decide how best to split your money
across the various types of credit, even
as the cycle matures or talk of interest-
rate rises ramps up. The managers have
the flexibility to invest across the entire
fixed income spectrum including
government bonds, corporate debt and
asset-backed securities.
With so much uncertainty in the
current investment landscape, this
ability should make strategic bonds
more appealing than ever before. But
investors need to do their homework
before they make a choice in this
82-strong sector.
Part of the problem, says Alex Moore,
head of collectives at Rathbones, is
that the parameters are fairly loose
compared with other sectors. Some
funds will focus on total return, others
on yield; some will
be fairly vanilla
while others will
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use derivatives to meet their goals; and
some will spread their money across a
range of credit types while others will
have a strong bias towards one area.
An uncertain appeal
Moore says: “High yield has been a
popular bias in recent years because it
tends to be more correlated to equities,
which have done very well, and
also produces a higher income,
which is appealing at a time when
interest rates are low.”
The appeal of this sector
at times of
uncertainty
is clear
from the latest
Investment
Association figures, which reveal it
was the third best-seller in December
with investors piling £203.7m into
these funds as markets dropped. IA
Sterling Strategic Bond now holds
£50.3bn of assets.
Among the issues these funds are
currently navigating include Brexit, a
trade war between the US and China
and the unwinding of quantitative
easing by central banks across the
globe. Volatility returned in 2018,
shocking
investors who had
become used
to seeing
markets rise
in a steady
line, and
asset
classes
no
longer move in tandem. But this
desynchronisation could be a good
time for strategic bonds to shine; when
markets are less correlated, managers
can show their skill.
Caught out
Andrew Jackson, head of fixed
income at Hermes Investment
Management, thinks some managers
could get caught out by this change.
He explains: “We have had this super
benign environment year-on-year
where every dip should be bought and
there is a real danger investors become
complacent. Not just about market
movements but liquidity and managing
risks; some may be too aggressive and
some may be too cautious.”
The scope for managers to get caught
out was made all too clear after the
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