During the turbulent latter half of 2008, investors approached the new sterling strategic bond sector with stability in mind. With a broad range of instruments at their disposal, funds in this peer group typically aim to provide a lower fluctuation in returns.
Sterling strategic bond funds, as well as global strategic bond products, allow a more flexible investment approach compared with other fixed-income sectors. For the sterling variety, the only restriction imposed is that funds must have 80 per cent of assets invested in sterling-denominated fixed-income securities.
Flexibility is a useful tool when markets are tough and the more varied the toolkit available to bond managers the better.
Hargreaves Lansdown senior analyst Meera Patel says: “We are more in favour of strategic bonds, which are more of a go-anywhere investment. They can invest in gilts and even higher-risk assets.”
Funds in the sector can differ greatly from one another, making the choice of manager and fund particularly important. Patel says: “Because bonds are more complicated than equities, fund managers’ skills have to be different. It is very important to choose the right one.”
But there is a lot more to this concept than simply choosing fund managers with strong performance in the short term.
Patel says: “Managers who appear to be struggling are not always bad managers. A good example of this within the strategic bond sector is Stephen Snowden, who went from being the top-performing manager to the bottom within a short time around 2008.”
Snowden, former manager of the £747m Old Mutual corporate bond fund, joined Kames Capital in April as a fixed-income manager. Many criticised Snowden’s short-term volatility but Patel says those who stuck with him have been subsequently rewarded as he is now performing very strongly.
According to FE AFI panellists, the sterling variety is a good option among the various types of strategic bond funds on offer. AFH Independent Financial Services head of research Graham Toone says: “Sterling strategic bond funds can give you global exposure.”
He adds that it is important to choose funds wisely. “There are apples and pears in this sector, so it really depends on what you are looking for.”
Whitechurch Securities head of research Ben Willis says that because investing in strategic bonds means buying into a fund manager’s experience and ideas, it can be a good idea to hold several different types to diversify against risk.
He says: “Because some managers will favour financial bonds, which are arguably exposed to sovereign debt, you could also hold other types of manager who are bearish on financials, such as those holding gilts. This acts as a hedge.”