Five funds to weather the bond market storm

26th May 2015


As bond markets wobble, Tom Stevenson of Fidelity Personal Investing looks at five fund options for investors…

In a worrying reminder of the taper tantrum of 2013, bond markets had another wobble recently as investors took fright at a German 10-year Bund yield of close to zero. A mini “flash-crash” saw bond yields spike higher and the question was asked, again, whether this was just some froth being blown off the market or the start of something more serious.

Because yields and prices move in different directions, this stumble represented a fall in prices for bond investors. The more important question, however, was whether this marked the end of what has been in effect a 30-year bull market for fixed income investors.

Bonds are undergoing a two-way pull at the moment. On the one hand, quantitative easing programmes in Europe and Japan continue to provide support, pushing prices higher and keeping a lid on yields. On the other, an expected pick-up in economic growth, and perhaps the return of inflation with it, threatens higher yields and a more difficult environment for bond investors.

In such an uncertain environment, investors who, quite sensibly, wish to hold a proportion of their portfolio in bonds are likely to be attracted to strategic bond funds. These funds combine government, corporate, high yield, emerging market and inflation-linked bonds in order to reduce their exposure to any single class of bond or market.

Strategic bond funds put the important asset allocation decisions, as well as the actual security selection, in the hands of an expert, in many cases with years of experience through a wide variety of economic conditions.

Fidelity’s Select List offers a broad range of strategic bond funds (sometimes called aggregate bond funds). Here are five to consider:

  1. Henderson Strategic Bond Fund: The Henderson Strategic Bond Fund is managed by John Pattullo and Jenna Barnard, who have been working together at Henderson since 2003. The fund has an unconstrained approach to investing across fixed income asset classes, based on the team’s assessment of the economic cycle. It’s a fluid process, combining bottom-up security selection with top-down macro factors. “We tend not to put ourselves in a box with regards to process,” the managers claim. “We are managing for an outcome and we will use the approach most suited to delivering this outcome. The outcome in this fund is a total return for investors.”
  2. M&G Optimal Income Fund: One of the biggest and most popular funds in this sector is the M&G Optimal Income Fund, run by Richard Woolnough, who recently came into our studio to talk through his approach. You can watch the interview here. With the most unconstrained strategy across all funds in M&G’s bond range, Optimal Income is extremely malleable and can be altered if Woolnough feels it will benefit investors, “We try to look through the whole economic cycle and behave like a bond fund that’s taking lots of credit risk when that’s an attractive thing to do, when we think interest rates and inflation are coming down. At the same time, we have a wide remit to be very defensive. So, if interest rates are going up and bonds aren’t as attractive then we can be very defensive.”
  3. Fidelity Strategic Bond Fund: Like Woolnough, Ian Spreadbury has been running bond funds over a long and successful career. His fund in this category, the Fidelity Strategic Bond Fund, recently clocked up a 10 year track record. It is a flexible fund, which allows Spreadbury to profit from whichever bond markets offer the best value through the course of the economic cycle. He aims to deliver a consistent income by managing the fund’s credit risk (the chance of a company failing to meet its obligations to lenders) and duration (the sensitivity of bond prices to a change in interest rates).
  4. Jupiter Strategic Bond Fund: Ariel Bezalel has been responsible for running the Jupiter Strategic Bond Fundsince its launch in 2008. Investment ideas for the fund come from the blending of Bezalel’s top-down views and his credit analysts’ bottom-up research. His focus is on deleveraging, improving credits, for which the downside risk is thoroughly assessed and monitored.  With an eye to enhancing the returns for the fund, Bezalel will also try identifying special themes and stories, such as company restructurings, which are not usually being covered and researched by most analysts.
  5. Newton Global Dynamic Bond Fund: One way of reducing risk when investing in bonds is to take a global view, especially as the asset class matures around the world, particularly in emerging markets. The Newton Global Dynamic Bond Fund has a strong five-year record. Managed by Paul Brain, the investment leader of Newton’s fixed income team, the fund exhibits a global thematic approach to investing. The fixed income team conducts its own research to translate relevant themes into investments to capture the returns. The fund looks to beat a short-term cash index and does so by investing in government (developed and emerging markets) and corporate debt (investment grade and high yield) around the world.

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