A quick look at...Sterling Strategic Bond funds

Rayner Spencer Mills’ Ken Rayner reveals which Sterling Strategic Bond funds should form part of your clients’ portfolios.

The IMA defines Sterling Strategic Bond funds as vehicles that invest at least 80% of their assets in sterling denominated (or hedged back to sterling) fixed interest securities. This includes convertibles, preference shares and permanent interest bearing shares (PIBs). At any point in time the asset allocation of these funds could theoretically place the fund in one of the other fixed interest sectors. The funds will remain in this sector on these occasions since it is the manager’s stated intention to retain the right to invest across the sterling fixed interest credit risk spectrum.

Macro uncertainty

The past decade has seen high levels of market volatility and in particular, since 2008, a bull market in government bonds. Considerable macro uncertainty remains over the path of the economic recovery. The most likely scenario for growth seems to be that it continues at a rate which in many economies will appear tepid, with ebbs and flows.

With growth at a low level, any slowdown will invariably provoke fears of a renewed recession but investors should remember that this type of sluggish economic recovery is actually typical of economic recoveries after a major banking crisis. As long as commodity prices remain under control, this should be accompanied by low inflation and low interest rates.

The market is fearful at the moment because a disorderly collapse of the euro would lead to severe distress in financial markets, resulting in a negative growth shock to the world economy. It is not surprising that the core government bond markets have been the best performing areas in fixed interest and it is to be hoped that policy makers have learnt that allowing preventable events to distress the financial system has severe consequences for the real economy.

This changing strategic environment has shown how difficult the fixed interest market is to manage and we continue to believe that using the skills of well-researched managers who can operate flexibly in this area rather than relying on a more static policy is the best way to deal with such evolving circumstances. We feel advisers should look to Strategic Bond funds to form the core of a portfolio.

The broad range of fixed interest options are often some of the most difficult to put together and manage in a coherent portfolio and individual investors rarely have the ability to move between the different types of fixed interest holdings in a timely manner it is because of this Strategic Bond funds can be so useful and should, we feel, form the core of the fixed interest holding.

Recommended funds

When choosing funds in this area, we would adopt a core and satellite approach. If only one fund is required, then a core fund should be considered first, with additional core or satellite funds being added to provide diversification or particular focus.

When looking at core funds, the following are examples of the funds we feel are particularly strong. All of these funds operate slightly differently and so could be combined successfully for a larger investment amount.

Fidelity Strategic Bond has a conservative approach with a focus on active asset allocation between sovereign investment grade and high yield with predetermined constraints.

L&G Dynamic Bond has an actively managed asset allocation and is flexible between the asset classes. It is totally unconstrained and uses derivatives widely.

M&G Optimal Income is an unconstrained fund with a macro overlay. M&G has a large credit team resource and this fund has a wide mandate including equities.