The All-Terrain Bond Fund Sector Gets Put Through Its Paces

Strategic bond is the “go anywhere” sector that gives its managers maximum freedom within fixed income. Given last year’s market turmoil, and with many tipping the return of inflation this year, its managers may be tempted to use every bell and whistle at their disposal.

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Funds must invest at least 80% of their assets in fixed interest securities. This must be either sterling denominated or hedged back into sterling. Managers have more leeway than those in other bond sectors to decide the credit quality and country they invest within that 80%. They can throw the fund from 100% gilts to 100% emerging market high yield and back again, should they choose—though few, I think, would make so bold a move.


Overall, the average strategic bond fund has behaved in the hybrid way that you might expect (table 1). High yield has far outstripped the other bond classes over one, three, and five years, being more correlated with equity returns in a period characterised by a strong rally in this asset class since the market lows last March. But it has done so with greater volatility.

Table 1: Bond Sector Comparative Performance

Source: Refinitiv Lipper. Data to 31 March 2021

UK government bonds, on the other hand, have suffered their worst quarter in two decades as investors have sold off the quintessential safe-haven asset in the hope of a UK recovery, propelled by the country’s faster vaccine roll-out.

Sterling high-yield, corporate, and strategic bond fund average returns have beaten their global bond peers over all the time periods listed. This is despite the fact that Refinitiv Lipper classifies more than half of the funds in the sector as global bond vehicles, and that seven of the top 10 performers over three years are also classified as such. So, the outperformance is likely not down to their country allocations.

Another thing to be mindful of with regards to a fund’s allocation is what’s happening with that other fifth of the portfolio. The ability to put 20% of the fund in an entirely different asset class can act as a significant kicker—or completely blow out its performance—depending on which way the wind is blowing. Few managers would want to use that degree of freedom, and Refinitiv Lipper would certainly consider such a fund to be a mixed asset fund, rather than a pure fixed income one. Indeed, we classify five funds in the sector as mixed asset.

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Disclosure: This article first appeared in the summer 2021 edition of Personal Finance ...

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