Threadneedle Investments has brought out the absolute return bond fund, an Oeic that aims to provide a positive return in any stock market environment.
The fund will invest in bonds, bond market derivatives and money market instruments under the Ucits III directive. It aims to beat a cash benchmark a target of 60 per cent above the three-month London Interbank Offered Rate before charges and tax. With Libor currently at about 4.5 per cent, Threadneedle says this could translate into a return to retail investors of around 5.75 per cent gross of tax. However there are no guarantees of capital or of the estimated returns.
The fund works by managing a well-diversified range of short-term strategies within strong risk controls. The fund will exploit small differences and anomalies between different types of bonds or bonds of different duration. It may also hold a large amount of cash or money market securities so returns will be made up of interest and capital gains.
The fund is managed by Threadneedle head of government bonds Quentin Fitzsimmons and fixed income fund manager Myles Bradshaw. Fitzsimmons joined Threadneedle in 2003 and has worked for Foreign & Colonial Investment Management, Equitable Life and Sun Life Assurance Company of Canada. Bradshaw joined Threadneedle in 2001. He started his career as an economist for HM Treasury and has worked for Prudential Portfolio Managers as an investment analyst.
Debates within the industry about the end of the bull market for bonds has created uncertainty and bond managers may find it difficult to achieve returns as high as those seen during the past decade. In this environment, Threadneedles absolute return strategy could work well. However, some investors may be confused by the strategy while others may feel the ability to short could double the chance of the managers making the wrong decision at the wrong time.