Old Mutual Asset Management has created the dynamic bond fund, a unit trust that aims for income and growth in all market conditions by investing in a range of fixed-interest securities.
The fund will invest in both investment-grade and high-yield corporate bonds, but can also invest in government bonds, convertibles and other forms of fixed-interest. It has a target monthly income yield of 6.18 per cent and this will be achieved by investing in the right type of security for the prevailing market conditions.
The investment strategy means the fund's asset allocation will shift throughout the credit cycle. Changes in the economy effect profitability and the credit quality of businesses, so if asset allocation is rigid, a fund may be stuck with bonds that are not doing as well as other types of fixed-interest securities when market conditions change.
The fund manager, Theresa Egan, will combine a top-down and bottom-up approach to bond selection. She will also draw on the skills of Old Mutual;s bond team. Egan has over 18 years' experience of fixed-interest markets and asset allocation. She has previously worked for Newton, United Bank of Kuwait and NatWest Markets.
Although interest rates are rising, they are still relatively low and the improving economy reflected by the interest rate rises is good for corporate bonds, as credit quality will be maintained. However, interest rate rises will be priced into the bonds, so investors may not be adequately compensated for the level of risk they are taking and may need to take higher risks to achieve the target yield.
As this fund's portfolio shifts in line with changing market conditions, a greater amount of the portfolio may go into high-yield bonds. This would increase the risks, even if the fund manager believes the shift was the best course of action at that moment in the economic cycle.