20
10
% 0
-10
-20
FIXED INCOME STRATEGIC BOND FUNDS
Strategic bond funds
Fixed income performance
Fixed income sectors – 3-year performance
£ high yield
UK gilt
-30
Apr ’07 Oct Apr ’08 Oct
Source: Financial Express Analytics
75
60
45
£ corporate bond
% 30
15
0
3 mth 6 mth 1 yr 3 yrs 5 yrs
IBOXX £ Corp A 4.54 5.33 31.96 -0.02 1.66
IBOXX £ Non Gilts A 4.63 5.72 31.51 0.46 1.97
IBOXX £ Sovereigns 4.08 4.3 11.27 5.84 5.38
IBOXX £ Overall 2.29 1.17 8.62 4.59 4.4
MSCI World
Source: Morningstar
2.74 6.53 49.09 -7.45 0.84
£ strategic bond
Apr ’09
Oct
£ corp bond
£ strategic bond
UK ggilt
gilt
£ high yield
-15
’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09
1 Apr ’00 – 1 Apr ’10. Source: Financial Express Analytics
Apr ’10
Fixed income sectors – 10-yr performance
’10
The truth be told
Do strategic bond funds have value in their own
right or is their popularity simply due to investors
preferring to outsource to a fund manager to make
their fixed interest asset allocation call? Bambos
Hambi believes both statements to be true
BY BAMBOS HAMBI,
MULTI-MANAGER AND
INDEPENDENT FUND
CONSULTANT
The Sterling Strategic
Bond sector was created
on 1 Sept, 2008 by the
Investment Management
Association (IMA) after
lobbying from the industry
and following a ten-month
consultation period. Many
funds moved across from
the UK Other Bond sector
which was disbanded.
Although the UK Other
Bond sector allowed managers
a great deal of freedom,
they were hindered
by the requirement to have
at least 20% of their assets
in below BBB-minus bonds
(high yield). IMA’s definition
of the Sterling Strategic
Bond sector permits funds
to invest at least 80% of
their assets in sterlingdenominated
(or hedged
back to sterling) fixed interest
securities. This includes
convertibles, preference
shares and permanent
interest-bearing shares.
The Sterling Strategic
Bond sector has been a
great success; the latest statistics
show that the bestselling
funds in February
were strategic bond funds,
with net retail sales of
£278m. The sector has
been among the top ten
best-selling IMA sectors for
20 out of the 26 months
since it was founded.
Interestingly, the lowest
selling IMA sector for the
same month was Sterling
Corporate Bond, with net
outflows of £140m, which
suggests some investors
have been switching from
one sector to the other.
l From nothing to 100
Strategic bond fund managers
have the ability to
be zero to 100% invested
in government bonds, corporate
bonds, high yield
bonds, emerging market
debt and take up to 20%
exposure to equities
and overseas currencies.
Managers have the flexibility
to make asset allocation
calls, thereby adjusting the
duration of their portfolios
and to move up and
down the credit spectrum
in response to economic
and market conditions.
Advisers who do not
have the expertise or time
to allocate themselves will
invest in these funds for
exposure to the wide vari-
ety of fixed interest instruments.
The sector will also
attract inflows from investors
whose assets are too
small to adequately diversify
across a number of
fixed interest managers.
But even multi-managers
make use of these mandates
and may have even
been influential in defining
the current objectives of
some strategic bond funds.
l Before the crunch
Many investors will recall
that before the credit
crunch, spreads across corporate
and high yield bonds
had been falling fairly consistently
for a number of
years. This resulted in some
excellent returns but had
caused valuation concerns.
As spreads had narrowed
and gilt yields had fallen,
downside protection was
increasingly important and
hence the ability of mangers
to not only invest in
different types of bonds,
but also to be active on
duration and to add value
using derivatives.
The launch of funds
with more tools in the
box to cope with the more
challenging background
was welcome and it was
pleasing to see the positive
response from groups
such as M&G, Artemis,
Cazenove, Schroders and
Henderson. The introduc-
52 PORTFOLIO ADVISER [www.portfolio-adviser.com] MAY 2010
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