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Adviser Fund Index

Strategic bond products were popular among Adviser Fund Index panellists during the May rebalancing.

Investor demand for flexible fixed-income mandates has strengthened in recent years and the trend was particularly noticeable in the Cautious benchmark.

Artemis strategic bond was selected for the first time by two advisers while M&G optimal income and L&G dynamic bond dominate the index weightings.

The popularity of such funds led the Investment Management Association to create a sterling strategic bond peer group in September 2008 and sustained demand has since seen it almost double in size to over £20bn.

The trend shows no signs of slowing, with the sector topping the net retail sales charts in the first four months of the year and taking £465m in April alone - the highest monthly figure since March 2010.

Charles Stanley collectives fund manager Shauna Bevan says strategic products form over 50 per cent of her firm’s fixed-income exposure.

She says: “We have increased our allocation to strategic bond funds this year, partly as a result of the interest rate environment. We also felt that there had been quite a lot of spread compression, so the valuation anomaly with investment-grade corporates had narrowed to some degree.

“So we took the decision to lock in that profit and then outsource the credit and duration decisions to a strategic bond fund manager.

“While it does not look like interest rates are going to rise any time soon, it is hard to call. Therefore, outsourcing some of those decisions to an experienced bond fund manager who has the flexibility to move up and down the credit spectrum, and to go short duration, is appealing.”

Budge director Chris Wise takes a similar line. Three years ago, Budge switched out of property into corporate bond and strategic bond mandates.

Wise says: “People recognise that rates are going to go up but at what point do you start to move tactically out of traditional corporate bond funds into other bond spaces?

“We came to the conclusion that we are better off delegating that decision to a strategic bond manager who has got that flexible remit rather than trying to do it ourselves.”

Both Bevan and Wise hold M&G optimal income and L&G dynamic bond within their AFI selections while Wise also uses Henderson preference & bond – a new addition to the AFI in May.

Bevan says she favours the M&G and L&G products because of the long track records of their managers, Richard Woolnough and Richard Hodges respectively, and the research capabilities of their employers.

She says the portfolios have different investment styles, with Hodges engaging in more “opportunistic” trading on the £1.6bn L&G fund.

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