STRATEGIC BOND FUND
Aim: Income and growth by investing in high yield and investment-grade corporate bonds.
Minimum investment: Lump sum £2,000.
Investment split: Investment grade corporate bonds 60 per cent, high yield corporate bonds 40 per cent.
Yield: 7.5 per cent.
Isa link: Yes.
Pep transfers: Yes.
Charges: Initial 3.75 per cent, annual 1.25 per cent.
Commission: Initial 3 per cent, renewal 0.5 per cent.
Tel: 0800 0684000.
The panel: Andrew Beddows, Financial practitioner, Inter Alliance,
Keith Lewis, Proprietor, Hartley Greatbatch,
James Stratton, IFA, Philip Milton & Co.
Suitability to market 7.7
Investment strategy 7.7
Past performance 6.7
Company's reputation 7.7
Product literature 8.0
Threadneedle Investments has established the Threadneedle strategic bond fund, an Oeic that will invest in a diverse portfolio of corporate bonds, from investment grade bonds through to high yielding junk bonds.
Considering how the fund fits into the market Stratton says: “Currently, given the markets in general and falling interest rates, the fund is entering a very competitive sector, with many similar launches. The fund does have a very good rating and an experienced manager which should help it do well.”
Beddows says: “It fits very well. This is a mixture of investment-grade and sub-investment grade bonds which does indeed lower volatility over the medium to long term while giving a reasonably good return.” Lewis says: “It is a very competitive market, with the distinct prospect of more of the same. Its yield of 7.5 per cent gross is still attractive.”
Identifying the type of client the fund would suit Beddows says: “The income seeker and those individuals looking to construct a balanced portfolio. Fixed-interest, mixed with equities also produces lower volatility while not compromising long-term returns too much. Many clients are now looking to construct portfolios similar to the make up to with-profit bonds as they have lost faith in many life offices' own with-profits bonds.”
Stratton says: “It is suitable for clients who require a combination of income and capital appreciation, who have a lower risk profile than would be necessary to invest in the equity markets. It offers an alternative to deposit based accounts and gilts, with a manageable and slight increase in risk profile. Investors waiting to re-enter the markets upon global recovery may view this as a temporary holding strategy. Older clients seeking income may also subscribe primarily.”
Lewis says: “For retired and elderly people as part of a portfolio of investments looking for income, although risk to capital has to be judged on its merits. The preference is for income, although there may be a growing demand to reinvest for low-risk capital growth.”
Discussing the potential marketing opportunities for the fund Lewis says: “The approach of the Isa season will hopefully bring a glimmer of hope to return to some stability. Government borrowing will limit falls in yield.”
Stratton says: “With the uncertainty in the markets and low interest rates, the fund will have excellent opportunities to grow very quickly. There is stiff competition, although I expect the fund will do well.”
Beddows highlights income seekers, cautious growth seekers and portfolio constructors. He also suggests clients who like the investment mix and who may be experienced investors.
Looking at the fund's strong points Stratton says: “In general terms, the product offers moderate capital growth as well as a good and sustainable yield, with a lower risk profile than equities. The 60/40 split between investment grade and high yield corporate bonds seems appropriate. Fund managers' low volatility and top quartile performance are reassurances for lower-risk investors.”
Beddows thinks it offers a good mix of bonds and good renewal commission. Lewis goes for the strong performance of existing funds by same manager and the use of strong graded bonds. He also feels monthly income and low relative volatility are strong features.”
Analysing the investment strategy Beddows says: “Very logical. The intermediary briefing explains clearly why the 60 per cent investment grade and 40 per cent high yield has been chosen. I would have liked to have seen a higher proportion of BBB-rated investment grade bonds as these have out-performed all other fixed-interest investments on a risk and return basis over 10 years.” Lewis says: “It would appear to be well managed with some sound economic features to control the portfolio and the right mix of bonds.”
Stratton says: “It is my opinion that equities and convertible preference shares currently provide better investment opportunities than bonds. The investment strategy seems sound considering the parameters by which the fund is restricted. High quality BB-rated bonds have much to gain from being upgraded to investment-grade, while BBB-rated bonds have a lot to lose from being downgraded to sub-investment grade; the fund strategy is therefore to invest more in BB-rated bonds as oppose to BBB-rated bonds. The currency benefit of the European exposure also affords superior yields and currency appreciation potential.
Turning to the downside of the fund Lewis says: “It is generally well placed, although some funds have established track records and pay higher yields.”
Stratton says: “It charges an initial 3.75 per cent whereas some of its competitors make no charge. It is exposed to only one sector of the investment markets, therefore in general, if bonds perform badly so will the fund. It will not benefit from any recovery movement in the equity markets and any increase in interest rates may result in capital losses.” Beddows can see no drawbacks.
Discussing the company's reputation Stratton says: “The company has a good, solid reputation. The manager is well experienced and has a good track record which counts for much in investment.” Beddows says: “It has good past performance and a good brand name.”
Turning to Threadneedle's past performance Stratton says: “I don't believe the company has produced especially exceptional returns but it has performed well in general, with good quartile rankings and a moderate volatility rating.” Lewis says: “Threadneedle has sound performance, although it has expanded rapidly over recent years and could become an even bigger player in the market.”
Identifying the likely competition Beddows goes for the M&G high yield corporate bond fund. Stratton says: “There are many similar products on the market. M&G high yield corporate bond makes no initial charge. Other offerings from Invesco and Gartmore would also represent strong competition.” Lewis cites Aberdeen high yield bond and Norwich Union higher income which have slightly higher yields than Threadneedle's fund.
Discussing the charges Lewis thinks they are competitive. Stratton says: “The charges are fairly similar to those across the industry. By paying 3 per cent commission to intermediaries, it does not have much choice other than to pass the cost on. The annual management charge seems reasonable.” Beddows thinks the charges are reasonable on the whole, but would like to see more managers using the M&G approach of exit penalties in place of an initial charge. He believes this ensures those who are investing for the medium to long term are not stung.
Beddows thinks commission is reasonable and Lewis thinks it is normal. Stratton thinks it seems about right and that it is consistent with the industry in general. He adds: “However, I dispute the adviser's right to renewal commission where no after-sales service or care is required.”
Looking at the product literature Lewis says: “It has very good support material and provides help with suggested paragraphs. It is easy to read and well-written, without too much technical detail.” Beddows says: “It is clear and concise. The fixed-interest concept and opportunity is well-explained.”
Stratton says: “It is well-written and presented. It is easy to understand and takes investors step-by-step through the investment procedures. Information on the fund manager is also good for promotional purposes. Posters help because the IFA can display them in a prominent place to generate more interest.”