M&G Optimal Inc vs Axa £ Strategic Bond
%
40
20
0
-20
-40
Axa Sterling Strategic Bond
Apr ’07 Oct Apr ’08 Oct Apr ’09 Oct Apr ’10
Source: Financial Express Analytics
tion of Ucits III rules was
another plus point as they
permit greater scope for
managers to add value
and protect performance
using derivatives and credit
default swaps (CDS).
The bottom graph on
page 52 shows the positive
returns made by the four
major sterling IMA bond
sectors since 2000. The
severe setback due to the
credit crunch in corporate
and high yield funds are
clear. The positive returns
in the gilt market as interest
rates were slashed and
the subsequent flight to
quality is also indicated.
l Wide-ranging results
Over the past three years,
the range of returns for the
sector has been very wide.
M&G Optimal Income
The M&G Optimal Income
Fund returned an impressive
33.9% with a disappointing
negative return of
9.2% from the Axa Sterling
Strategic Bond Fund (see
graph). Over this period,
eight funds lost investors
money. As ever, this highlights
the importance of
fund pickers having the
time and resources to carefully
select the right fund.
The key to the M&G
fund’s performance was the
defensive stance taken in
the credit crisis and avoiding
most of the toxic bank
debt. Manager Richard
Woolnough has also been
adding value by being
active on duration calls.
Another positive factor
is the resource available
within M&G, one of the
largest fixed interest teams
in Europe, with access to 71
analysts. But a large team is
not vital to performance
as proved by the performance
of the Cazenove and
Artemis bond funds.
Due to the freedom
afforded fund managers,
the sector contains many
different types of fund. A
number will never have
any exposure to equities,
while some such as
Artemis High Income and
Invesco Perpetual Monthly
Income Plus, two popular
funds with long histories,
tend to actively allocate up
to 20% to equity and convertible
shares. Some funds
will only invest in equities
if the company’s dividend
yield is higher than its corporate
bond.
Funds such as Henderson
Strategic Bond employ
CDS, both index and individual
names, and interest
rate futures. But not all
managers have the skill to
add value in these areas.
It is also imperative that
the front and back office
have the expertise to
cope with these complex
instruments.
l A foreign affair
Other differences to be
found among funds in this
sector include the allocation
to foreign currency
Top 10 strategic bond funds by Morningstar rating and 3-year performance
FIXED INCOME STRATEGIC BOND FUNDS
exposure. Some will use
their full 20% allowable
allocation while others will
control this to a few percentage
points. Some will
always be fully exposed or
hedged back to sterling.
A final area to monitor is
the resource and adeptness
in investing in emerging
market debt. Many groups
do not have the capability
to invest in this area
while larger houses such
as Schroders are looking
to add value not only in
dollar denominated debt
but also local debt and
even emerging market corporate
bonds.
It is certain that at some
stage interest rates will rise
from their low emergency
levels currently seen in the
developed world. Less certain
is the view on economic
growth with fears of a
double dip. Strategists and
economists seem equally
split on whether one
should be worrying about
inflation or deflation.
A strategic bond fund
gives fund managers the
flexibility to be able to
respond to changes and
offers a good choice in
these uncertain times for
both the sophisticated and
less sophisticated investor.
Bambos Hambi can be contacted
at bambos.hambi@
googlemail.com
M’star Fund 1 year 3-year 3-year 3-year 3-year 3-year Launch Domicile
Rating size (£m) chg (%) chg (%) Sharpe Sortino Alpha Beta date
M&G Optimal Income A Acc ★★★★★ 1,987.15 33.84 10.69 0.79 1.18 6.01 0.62 8 Dec ’06 UK
Fidelity Strategic Bond ★★★★★ 383.31 26.49 8.54 0.61 0.91 5.06 0.68 18 Apr ’05 UK
Henderson Strategic Bond A Inc ★★★★★ 764.06 49.9 7.73 0.38 0.55 -3.72 0.53 22 Oct ’99 UK
Cazenove Strategic Bond A Acc ★★★★★ 369.87 30.7 7.43 0.4 0.5 -2.19 0.4 4 Apr ’06 UK
Investec Sterling Bond A Inc Net ★★★★ 221.38 25.45 7.33 0.49 0.71 3.91 0.7 7 Oct ’91 UK
UBS Active Bond A Acc ★★★★ 41.02 6.38 6.85 1.04 2.55 2.63 0.34 1 Apr ’05 UK
Rothschild Preferred Income A2002 ★★★★ 57.15 8.53 6.68 0.67 1.11 2.99 0.29 17 Dec ’02 UK
Fidelity Extra Income Inc ★★★★ 466.99 40.91 6.26 0.3 0.42 -4.4 0.47 17 Mar ’99 UK
Schroder Strategic Bond Acc ★★★★ 286.51 9.72 4.59 0.18 0.26 0.82 0.09 5 Sep ’03 UK
Henderson Preference & Bond I Acc ★★★★ 670.12 63.55 4.5 0.12 0.17 0.14 1.15 10 Sep ’78 UK
Source: Morningstar
SUMMARY
The IMA Sterling Strategic
Bond sector has been
incredibly popular with
investors since its creation
in 2008 and now houses
some of the best-selling
retail funds in the UK.
But investors should be aware
that funds in the sector often
have very different mandates
and use a variety of different
tools and so the range of
returns from the funds has
been extremely wide.
A key asset class that
could drive future returns
is emerging market debt,
although not all funds have
the capability to invest in
this area.
MAY 2010 [www.portfolio-adviser.com] PORTFOLIO ADVISER
53
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