The fund is an unconstrained global bond fund that can use derivatives under the Ucits III directive to take synthetic short positions. The greater investment flexibility of Ucits III allows fund manager Richard Hodges to navigate difficult markets and boost returns by shorting techniques using derivatives.
Hodges is an associate director in L&G’s fixed income team. He joined L&G in 2007 from Gartmore, where he was senior investment manager and head of pan European portfolio construction for fixed income.
The new fund will invest in a range fixed and variable income securities, with the flexibility to span investment grade and high-yield bond markets.
Its ability to use derivatives for investment purposes gives the potential to generate positive returns even when markets are weak and allows Hodges to control risk in ways that traditional bond funds cannot.
However, the use of derivatives carries specific risks. For example, swap markets may be less liquid at times that bond markets, which means the fund manager may need to sell direct bond holdings he likes to create sufficient liquidity.
More fund management groups are using the wider investment powers of Ucits III in bond funds. Some, such as UBS, Threadneedle and Baring Asset Management, already offer these to the retail market but the L&G brand name and this fund’s one year track record could provide a comfort factor to those who like the concept of a dynamic bond fund.
However, some investors may be confused by the strategy while others may feel the ability to go short using derivatives could double the chance of the managers making the wrong decision at the wrong time.