Having focused purely on equity funds in this column so far, a look into the bonds waiting room is long overdue. The obvious starting point is the Sterling Strategic Bond sector, which has grown rapidly in importance and size post the global financial crisis to become a staple part of a balanced managed portfolio.
Investors’ appetite for these ‘go anywhere’ bond funds has been accelerated by an era of historic low interest rates. But looking at these funds grouped together does cause the buyer some challenges, with some seeking a total return while other looks for capital and income, so the best advice is to always read the label before investing.
Central banks in western economies have been easing monetary policy for many years, with ever-increasing desperation to spark a fire in the global economy. We have witnessed extraordinary policy including quantitative easing and more recently a move towards negative real yields – it is estimated nearly a third of developed government bonds in issuance trade below zero.
However what most investors are fearing is interest rate normalisation. This has already begun, albeit very slowly, in the US with the first post-crisis rate rise taking place nearly a year ago. This sector, given its flexibility to invest across the full breadth and depth of the fixed interest markets as well using derivatives to reduce duration risk, is seen as providing a solution to rising interest rates.
There are eight funds in the waiting room of this sector, and as already stated, an investor is unlikely to find a pair of matching products. JPM Global Bond Opportunities has an unconstrained mandate with the objective of seeking a total return and measuring success against Bloomberg Barclays Mulitiverse Index, hedged back to sterling.
What’s notable here is the experience of the investment team, with Bob Michele and Nick Gartside two of the three named managers. Neither of these managers can be described as novices and much experience is required in running a flexible mandate. This is a high conviction approach with the managers investing across 15 fixed interest sectors and 50 countries, adjusting both the asset allocation and duration to suit current and future market conditions. Since launch nearly two years ago, duration has ranged from 4 to 6 years, and is currently at 4.9, according to the factsheet. The fund has yet to draw investors with less than £20m of assets under management.
Next up is another fund run by a large global asset management company with significant resources, which must be an advantage in such a wide and deep bond universe. Simon Blundell and Ben Edwards are the managers who launched BlackRock Sterling Strategic Bond fund in May 2016. This fund has the objective of generating an unconstrained income, although the current stated 2.9 per cent yield on the factsheet may not seem that high. Such is the thirst for income however that attractive yields are not easy to come by without taking excessive capital risk.
This yield is achieved by building a core portfolio of low turnover, high quality names, which are supplemented with high conviction asset allocation calls. Interestingly, but perhaps not that uncommon in this sector, the fund has no stated benchmark although the managers’ commentary does refer to the average sector return. The £32.1m fund is currently predominantly invested in sterling bonds with a large bias to BBB and BB credit issuance. The success of this fund will depend on how the managers can navigate the bond markets as yields begin to rise.
The strategic bond sector houses a range of funds and investment objectives as well as some unfamiliar names. Muzinich, a US-based manager, may not be that familiar to some but is a specialist in managing fixed interest portfolios. This is a privately-owned business and the founding family still have a heavy involvement in the day-to-day management of the funds. Muzinich has grown a reputation for high yield investing and their short duration product has been popular among professional fund buyers. Muzinich Global Tactical Credit Fund is managed by Michael McEachern and launched in November 2013. This is another fund that takes a ‘go anywhere’ approach with the aim of beating US$ Libor + 5 per cent on a three to five rolling period.
Since launch, the fund is behind this benchmark but the managers ask for time and patience to achieve results. The manager is supported by a team and a company focused on researching credit. Their proprietary work allows a range of mandates to managed and distributed in the US as well as Europe. With $850m in the fund according to the latest factsheet, it can safely be said that this one has established itself in the sector.