Get under the bonnet of your Strategic Bond Fund
With the strategic bond sector appearing in the top three in the IMA sector list for the third month running, Fidelity International Portfolio Manager Eugene Philalithis is urging investors to do their research before choosing their strategic bond fund to ensure its strategy suits their investment objectives.
The flexible nature of the strategic bond sector means that unless thorough research is carried out some investors could find themselves in a fund that does not meet their investment aims.
Strategic bond funds have risen greatly in terms of their popularity among investors in this uncertain economic environment because of their flexible nature. The fund manager can change the balance between different types of bonds, giving the funds the ability to respond to changes in the market. However, the scope available to managers is so vast that funds can vary greatly in terms of risk, volatility and diversification.
Eugene Philalithis, Portfolio Manager, Fidelity Multimanager Income Fund explains: "Some strategic bond funds take care of an investors entire bond portfolio very well, but the sector accommodates many other funds that adopt very different strategies. The fundamental differences between funds in the sector are arguably greater than those in, say, any of the UK equity sectors and investors should be aware of this when selecting their funds."
Investors need to think about what they are trying to achieve from their fixed income allocation - income, equity diversification or low volatility - and do their research to choose the most appropriate funds for their needs.
When choosing a strategic bond fund there are some key guidelines investors should keep in mind:
The main aim is to understand what the manager is trying to achieve and deciding whether it fits your strategy.
Understand which bonds the manager is buying (government, investment grade and high-yield), why (what drives their buy, sell and hold strategy), and in what proportions.
Look at what alpha the fund manager is able to achieve, whether this is within an affordable risk budget and whether their process is repeatable.
Once the decision about which are the best funds is made, establish an acceptable review process to monitor the ongoing performance and suitability of the fund.
Philalithis concludes: "For every "all weather" fund, there is a targeted fund playing a specific strategy. An example might be a defensive high-yield fund that plays the under-researched securities that sit on the border of investment grade and high-yield bonds. Within the tight confines of this borderline, the manager alters their exposure to high-yield and investment grade and so the fund is a strategic rather than a conventional bond fund.
"This means the strategic bond fund has something for everyone. There are broadly managed funds for investors who wish to leave their fixed income to a professional manager. And for experienced or professional investors capable and willing to manage their own bond asset allocation, the sector is also a goldmine of opportunity."