Joanne Ellul reports on strategic bond boom business
Strategic bonds dominate Investment Management Association sales figures with investors and IFAs drawn to the flexibilities on offer.
The broad definition of the sector allows managers to invest across the sterling fixed-interest credit risk spectrum. In an environment where there is heightened uncertainty about inflation and the direction of interest rates, such flexibility is very attractive.
The only major requirement of the sector is that funds must invest at least 80 per cent of their assets in sterling-denominated fixed-income securities.
In April, the strategic bond was the best-selling IMA sector for the fourth month running, with net retail sales of £465m. The strategic bond sector took 39 per cent of gross sales of bonds in April.
Jupiter’s Ariel Bezalel, manager of the firm’s £418m strategic bond fund, says: “High-yield and investment-grade corporate bonds are under pressure because they only work for part of the economic cycle whereas strategic bonds work through the season.”
Bezalel has lowered the high-yield exposure of the fund. Bezalel says: “We had 65 per cent in high-yield bonds at the beginning of the year. Now we have bit less than 50 per cent.”
In terms of the £572m Jupiter high-income fund, Bezalel has also brought down high-yield exposure from 60 per cent to 50 per cent a few months ago.
Bezalel has been raising his Australian government bond exposure from 13 or 14 per cent to 20 per cent over the last three months in his strategic bond fund as such bonds give protection against any slowdown in the economic system with their strong link to emerging markets.
Henderson head of retail fixed income John Pattullo, manager of the £1.1bn strategic bond fund, has not been impressed with the quality of issuances this year and has only bought 18 per cent of new issuances compared with 40 to 60 per cent two years ago. He says: “We have taken 10 per cent out of investment-grade financial bonds last autumn and put it into cash. We might add 5 per cent to high-yield bonds over the next month or so, buying better quality high-yield bonds.
He says at the end of the year, the high-yield bond exposure could be reduced from 50 per cent to 30 per cent to take advantage of the economic cycle.
Pattullo also uses duration to take advantage of the market. “We have been managing the vagaries of inflation this year through using short and long sovereign bonds whereas last year we were short on the gilt market, which, when the market rallied, worked against us,” he says.
Cazenove head of credit Peter Harvey, manager of the Cazenove strategic bond £714m, says: “Credit spreads are still optically wide and fully compensate you for potential defaults but the wider economic risks have risen. The Western debt burden presents a significant risk to growth, where it is difficult for an economy to expand when every sub-sector is trying to deleverage.”
He considers the credit market a hold and has started to trim some of his riskier positions. “We have moved our banking exposure from majority subordinated to majority senior over the past year,” adds Harvey.
Standard Life head of credit and aggregate Andrew Sutherland, manager of the Standard £78m strategic bond fund, is planning to increase high-yield bond exposure to 50 or 60 per cent over the summer from 25 per cent now. He says: “We have added 3 per cent to high yield in the last week or so from 22 per cent. High-yield bonds work well in a steady low-growth, low-interest-rate environment,” he says.
Skerritt Consultants head of investments Andrew Merricks says: “The economic outlook is uncertain but when this changes, strategic bonds will be less popular, as you will not need to be hedging your bets. The risk in strategic bonds is also in whether the manager makes the right allocation decisions.”