Alliance Trust Asset Management head of fixed income Rod Davidson has warned of a lack of transparency in the strategic bond sector.
He says a derivative overlay strategy as well as a disparity between what each fund is doing in the sector can make it hard for investors to choose the appropriate fund.
Davidson says: “The heavy use of derivatives to hedge out various exposures at different times can cloud the issue. You also do not have perfect hedging tools for high yield at present. Investors will not understand when they see a +10 and -10 return over 12 months. That is completely different to the corporate bond sector where returns are not so spread out.”
He says strategic bond fund managers can have trouble shifting assets between the three main allocations of government, investment grade and high yield.
Davidson says the company is looking at adding an absolute return fixed-income offering.
He says: “We are conducting a review of the sector but we do not feel it is the right market for an absolute return product just yet.”
Skerritt Consultants head of investments Andy Merricks says: “You need to be able to move money in a strategic bond fund, so derivatives can be an important tool but it is important that advisers know how managers use them. They are like a bread knife in that they can kill you or make a good sandwich.”