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Adviser Fund Index

The allocation towards fixed income across the three benchmark Adviser Fund Index portfolios remained broadly stable in November as the shift towards flexibility continued apace.

The Legal & General dynamic bond fund features prominently in the cautious portfolio, with six panellists including it among their fund picks. Perhaps unsurprisingly, therefore, it also has a strong presence in the balanced portfolio, where is got five nods from the panel. Perhaps of greater note, however, is that it has also found its way into the aggressive portfolio, albeit through a single panellist. It is joined there by the Aegon, Cazenove, Henderson, M&G and Schroder strategic bond funds.

Sam Owen, a portfolio manager at Beckett Financial Services and an AFI panellist, says: “We have 15 per cent exposure to fixed income in our balanced portfolio through L&G dynamic bond. We tend to hold strategic bond funds as they have more flexibility than we do to move up and down the quality scale. In part, this desire for flexibility can be understood as a reflection of continued uncertainty over the outcome of the inflation/deflation debate.”

Whitechurch Securities head of research Ben Willis says: “We go with strategic bond funds because you do not have to make a call on where the market is going. Your average investment manager simply does not have the ability to analyse the market that a specialist can offer.”

Certainly, some of the funds in the Investment Management Association £ strategic bond sector have appeared to justify this conviction. The L&G dynamic bond trust, managed by Richard Hodges, has returned 54.61 per cent over the past three years to November 23.

For the sector as a whole, however, the picture is less clear-cut. Over the past three years, the average fund in the sector has returned 12.94 per cent, marginally outperforming the £ corporate bond sector return of 11.56 per cent and significantly underperforming the £ high-yield sector return of 23.21 per cent.

The performance cushion between the £ strategic bond and £ corporate bond sectors to account for the additional risk of including high-yield assets is not perhaps as big as many would be comfortable with. Of course, as shown with the L&G fund, this must be addressed on a case by case basis. Indeed, these products can also be included alongside more traditional investment-grade bond funds or high-yield products to act almost as a hedge.

Strategic bond funds have become a core part of AFI portfolios and the trend looks likely to continue. Whether it will endure if the bond markets start to normalise is yet to be seen but the solid performance of a number of these products will have given many investors ample proof of their value.

Data supplied by Financial Express


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