Type: Unit trust
Aim: Growth and income by investing globally in fixed-income securities issued by governments, government agencies & companies, and derivatives
Minimum investment: Lump sum £1,000, monthly £50
Investment split: 100% globally in fixed income securities and derivatives
Isa link: Yes
Charges: Initial 3.25%, annual 1.25%
Commission: Initial 3%, renewal 0.5%
Tel: 020 7658 3894
Schroders has recently added a strategic bond find to its unit trust range The fund aims for total returns, comprising growth and income, by investing globally in the best opportunities across government bonds, investment grade corporate bonds, high yield corporate bonds and emerging market debt issued by companies and governments. Derivatives can also be used to reduce risk, with 80 per cent of the portfolio hedged back to sterling.
Schroders believes this type of ‘go anywhere’ bond fund will appeal to investors who are looking for diversification from equities and for higher returns at a time when interest rates and yields on money markets and government bonds in the west are low.
Putting the fund in to its market context, Chadney Bulgin partner Bruce Bulgin says: “Some of the major issues facing advisers and their clients relate to income returns. Cash returns are poor unless money is tied up for years and there is always the possibility of interest rates rising. Also the investor cannot readily access his or her money.”
Bulgin adds that against this background other options include fixed interest, “But the low-risk end of the market is offering returns only marginally greater than cash and there is always the risk of falling capital if interest rates rise. Structured products can offer attractive rates of return but capital can be in jeopardy,” he says.
Bulgin thinks that in many ways the strategic bond sector can offer superior income returns with an unconstrained approach both within the UK and also globally. “With this in mind, the introduction of the Schroder strategic bond fund is a welcome addition to the range of options open to advisers. The fund is actively managed and invests in government bonds, investment grade corporate, high yield corporate and emerging market debt of both government and credit. To limit downside risk use is made of derivatives and 80 per cent of the fund is hedged back to sterling,” he says.
With this strategy, Bulgin expects income returns to be well above average and there could also be underlying capital growth. Discussing the charges, he says: “The charges are about average at 1.25 per cent for the retail share classes. There is an initial charge of 3.25 per cent but this includes an initial commission. Institutional share classes have much lower annual management charges, but the minimum initial investment limits are high at £25m. In reality, most advisers will buy the fund through platforms and Schroders has made the fund available through the major providers.”
Looking in detail at the fund’s investment strategy, Bulgin says: “The Schroder strategic bond fund differentiates itself with the use of derivatives and sterling hedging, which should help reduce risk for many UK investors.” He adds that Schroders is a major fund manager and boasts over 100 fixed income investment professionals, located in nine cities located round the world and has more than £187 billion under management. “The global exposure is of immense value in the context of the global investment remit of the Schroder strategic bond fund,” says Bulgin.
In Bulgin’s view, the new fund can be used as part of an asset allocated portfolio to reduce equity volatility. “However the fund may be more volatile than some other bond funds, notwithstanding the currency hedging and use of derivatives.
“The lead fund manager Gareth Isaac and alternate fund manager Bob Jolly have many years experience in the fixed interest sector. Both joined Schroders in 2011 and Isaac was previously a successful fund manager with GLG. Jolly spent much of his career at Gartmore and immediately prior to Schroders was with UBS Global Asset Management.”
Turning to the potential drawbacks of the fund Bulgin says: “On the down side, as is the case with many actively managed funds, the remit is so wide that it is difficult to know what is going on. If the strategy works then great but if the fund managers make the wrong calls then there will be underperformance and disappointed investors.”
Bulgin also feels that the use of derivatives and hedging will increase costs. “As with other actively managed funds, the management charges will be more than would be the case with a simple passive offering. There may also be a degree of credit risk relating to emerging markets and high yield. In addition longer duration holdings could lead to falls in value should interest rates rise, though this is less of an issue with high yield.
“In short, as with any active fund, to some extent there has to be a leap of faith in that there is an expectation of the fund managers delivering above average returns. But by definition many managers will deliver below average returns, and account has to be taken of cost drag in respect of management fees.”
Identifying funds that will provide competition, Bulgin says: “There is a great deal of competition in this sector. There are long established funds such as Henderson’s strategic bond fund as well as offerings from Invesco Perpetual, M&G and the other leading and specialist fund managers.”
Summing up, Bulgin says: “The investment strategy looks sound and the use of derivatives and currency hedging should provide a degree of protection against downside risk. Many advisers will be attracted by the diversification in terms of asset classes and underlying holdings so the Schroder strategic bond fund can form a cornerstone of the fixed interest investment strategy of any portfolio.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average