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Strat attack: rise and risks of the bond funds with muscle

At a time of economic uncertainty, strategic bond funds’ ability to buy anything at any time is useful, but investors should keep an eye on liquidity and risk.

Strat attack: rise and risks of the bond funds with muscle

Some advisers are turning to strategic bond funds, which have greater freedom over how they can invest, in a bid to improve their chances of generating decent returns in the uncertain economic environment, though others are more sceptical.

Gordon Bowden, director of Buckinghamshire-based Quainton Hills Financial Planning, said most of his fixed income allocation was heading into strategic bonds.

‘I like the idea that the fund manager can move relatively quickly should interest rates move or there is a sell-off in bonds,’ he said. ‘They can choose the level of relative risk to take.’

He believes consistency of performance is the crucial factor. ‘They are the low-risk part of our clients’ portfolios so we’re not looking for someone that’s trying to bust the lights out in terms of performance. In fact, we’d be suspicious about the risk they were taking if they achieved high returns,’ he said.

Colin Low, managing director of Ipswich-based Kingsfleet Wealth, has used strategic bond funds for several years and says they are the best way to gain exposure to fixed income.

‘I can’t see it is of any benefit to any client to be in any underlying fixed interest fund that’s just narrowly focused on gilts, investment grade or high yield,’ he said.

Source: Lipper

Valuable flexibility

Low believes strategic bond funds’ flexibility is the key.

‘Ideally we want a manager that can buy anything at any time as this allows them to flex their muscles in any direction they choose,’ he said. ‘If they feel the world is imploding, they can stock up on government debt, but if the market is moving ahead, they can buy high yield.’

Low said it was important to consider fund liquidity issues. ‘We could see this was a bit of a problem with the M&G Optimal Income fund and we moved pretty much every client out six months ago,’ he said. ‘Its performance has tailed off because it’s so big and there are obviously some liquidity issues.’

Alex Bland, investment manager at Cambridgeshire-based Beacon Wealth Management, also moved out of the M&G Optimal Income fund, which is managed by Richard Woolnough, who lost his Citywire rating in October but has a long track record of success.

‘We had exposure but became uncomfortable about its size,’ said Bland. ‘Richard Woolnough is a genius but the fund is huge.’

Bland said there was always a space for strategic bonds in his model portfolios and that Citywire AA-rated George Luckraft’s AXA Framlington Managed Income fund was a vehicle he favoured.

‘His performance has been relatively consistent and the fund is still a manageable size,’ said Bland.

Diversifying risk

However, Justin Modray, director of Buckinghamshire-based Candid Financial Advice, said investors should not get too excited about strategic bond funds.

‘They’re not the panacea, and if bond markets tumble, then a strategic bond manager is likely to suffer along with the rest, albeit hopefully not to the same degree as someone running a plain vanilla corporate bond fund,’ he said.

Modray has exposure to strategic bond funds but prefers to buy more than one to diversify risk.

‘We use Jupiter Strategic Bond coupled with Fidelity Strategic Bond quite often,’ he said. ‘The Jupiter fund tends to be more aggressive while Fidelity’s is more cautious. We see that as being a sensible blend of management styles.’

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26/47 in Bonds - Sterling Strategic Bond (Performance over 3 years) Average Total Return: 11.64%
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