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Smokescreen strategy

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When the IMA sterling strategic bond sector was implemented on September 1, 2008, it was welcomed by all parties as a step forward. The other bond sector was no longer working and had become a dumping ground for any fixed interest fund that did not fit the alter-native fixed interest sector definitions. Sector comparisons had become meaningless as a result.

Three years on and the sector seems to be slipping again. There is a big divide between the strong and weak performers, which I fear has more to do with product design than manager skill.

The names of the funds in the sector provide a clue as to which are truly strategic and those operating a more one-dimensional strategy. Names such as long bond, long-dated or even high yield indicate what strategy the fund will be employing most of the time.

The IMA definition of the strategic bond sector says: “At any point in time, asset allocation could theoretically place the funds 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
This definition is open to interpretation as it refers to a manager’s stated intention rather than specific actions.

Looking at the performance of the underlying funds this year, strategies with a bias towards long-dated bonds have outperformed, returning well over 10 per cent. But are these funds really strategic? Some of those funds that have done poorly seem to have had an almost permanently high allocation to high-yield bonds. Again, is this strategic?

Asset allocation is a fund manager’s choice but the problem comes when this allocation is hard-coded into the fund design, regardless of market conditions.
Most advisers assume the funds in this sector have both the flexibility and the desire to adjust their asset allocation across the fixed interest spectrum but, in reality, many funds have no intention of this.

Therefore, it is crucial when considering the strategic bond sector that a full analysis of the positioning of the funds is undertaken. This should not just be a snapshot in time but a detailed look at how managers have adjusted their asset allocations to adapt to the changing market conditions.

Quartile rankings may once again become irrelevant in this sector and if the problems persist, the IMA may have to find a solution for fixed interest fund comparisons. As always, it is vital to look beyond the marketing smokescreen.

Ryan Hughes is portfolio manager for Skandia Investment Group

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