The bond market has traditionally been viewed as a safe haven, but low yields and increased volatility have left investors seeking sources of higher income.
But while fixed interest is often viewed as a safe haven in comparison with equities, diversification remains essential for investors looking to avoid a nasty shock. There are many different types of bond, and too much exposure to a single type may leave you in a vulnerable position.
Strategic bond funds offer a mix of corporate bonds – issued by companies looking to raise capital - and government bonds, known as gilts if they’re issued by the UK government.
Some strategic bond funds even have a small allocation to equities.
highlights five of the best:
Jupiter Strategic Bond
Since the launch of the £1.2bn Jupiter Strategic Bond in June 2008, it has almost doubled the returns of its sector, delivering 64.04 per cent over the period, compared to the IMA Sterling Strategic Bond sector average's 31.48 per cent.
Performance of fund versus peer group composite
Source: FE Analytics
FE Alpha Manager Ariel Bezalel
, who also heads the Jupiter High Income and the Jupiter Monthly income funds, has returned 60.75 per cent since he began running Jupiter portfolios around four-and-a-half years ago. This is more than twice as much as his peer group composite
The Strategic Bond fund is a top quartile performer in its sector over one and three years and currently has a yield of 5.50 per cent – well ahead of the average in the sector.
According to FE Analytics
, the five FE crown rated fund is significantly underweight the UK. Among its top holdings are Australian government bonds and corporate bonds from companies such as Microsoft and Anglogold.
Fidelity Strategic Bond
The £1.1bn Fidelity Strategic Bond fund, headed by FE Alpha manager Ian Spreadbury
, is a top-quartile performer over a five year period.
Spreadbury steered the fund successfully through the rocky 2008 financial crisis, a feat not matched by many other funds in the sector.
Since its launch in 2005, it has returned 59.86 per cent while its sector average has returned 38.98 per cent. It is currently yielding 2.91 per cent.
Performance of fund versus sector since launch
Source: FE Analytics
Spreadbury, who heads a number of fixed interest portfolios at Fidelity, has beaten his peer group composite over a lengthy track record.
He has returned 94.87 per cent over the last decade, outperforming his peer group average by 27.47 percentage points.
The fund is currently overweight government bonds, around which there is much debate at present as low yields and high price tags that accompany this perceived safe haven, have turned many investors away.
However, for cautious investors, the fund further reduces its level of risk by holding nearly 500 stocks in the portfolio.
Tim Cockerill, head of collective research at Rowan Dartington, says investors with a cautious outlook should look into the Fidelity Strategic Bond fund.
“The fund typically takes a less risky approach to other strategic bond funds, but that is how Ian Spreadbury likes to do things,” he said.
“It is a case of getting a good handle of what a fund is about. If you want a quite defensively minded manager this fund is a very suitable fit.”
“But if you want more income in your fund, than this Fidelity fund is not where you are going to go,” he added.
Artemis High Income
The £553.8m Artemis High Income fund, managed by FE Alpha Managers Adrian Frost
and Adrian Gosden
, has outperformed its sector over one, three and 10 year periods.
Over the last decade the four-crown rated fund has outperformed the IMA Strategic Sterling Bond sector by 38.98 percentage points with returns of 110.87 per cent. It has a yield of 6.30 per cent.
, a multi-manager who heads up the EFA OPM Fixed Interest fund, recently told FE Trustnet that the Artemis High Income is attractively positioned as tail risks have been reduced by monetary stimulus being implemented by central banks.
The fund was launched in 1995, but the current management team have run the fund for the most recent decade of outperformance.
According to FE Analytics
, the fund is slightly overweight the UK region compared to its sector. Its largest position is in the insurance sector with 24.36 per cent. It holds financials such as F&C Finance, Henderson and Scottish widows in its top-10 holdings.
Cockerill says that investors should be wary of the Artemis fund’s multi asset approach, but thinks it is a good investment nonetheless.
“In general, I’m not really a fan of funds that mix equities and bonds when constructing their portfolio,” he said.
“So for me, Artemis High Income is better suited to a small investor who wants a one stop shop to get diversified exposure across the board.”
“It is less risky than other funds and I think Mr Frost is an extremely good manager.”
The fund currently has 13.2 per cent in the equity market.
M&G Strategic Corporate Bond
The popular £5.7bn M&G Strategic Corporate Bond fund is headed by FE Alpha Manager Richard Woolnough
Over his lengthy track record, Woolnough has significantly outperformed his peer group composite in rising and falling markets.
The Strategic Corporate Bond fund, which is currently yielding 3.26 per cent, is a top-quartile performer over three and five year periods. Since the fund’s launch in 2004, it has returned 88.52 per cent compared to the IMA Sterling Corporate bond sector average of 43.82 per cent.
The fund’s top three holdings are all UK gilts, but M&G Strategic Corporate Bond fund also counts fixed income assets from corporates such as blue-chip US retailer Walmart, Virgin Media and EDF Energy among its top-10 holdings.
The fund is underweight the UK region, with the manager leaning more toward European holdings.
Cockerill thinks that investors have to go a long way to find a bond manager as good as Richard Woolnough.
“It is a good fund that clearly invests in a cautious way, which isn’t a bad thing,” he said.
“You are buying Mr Woolnough, who in my opinion has been one of the best forecasters of the macro-outlook for the last couple of years. This is shown in this strategic portfolio, as he has more flexibility than he does in his corporate bond.”
Henderson Sterling Bond
Since FE Alpha Managers Stephen Thariyan
and Philip Payne
took over the five-crown rated Henderson Sterling Bond fund three-and-a-half years ago, they have completely turned around performance.
With returns of 107.55 per cent, the £492.8m portfolio has more than doubled the returns of the average Sterling Corporate Bond fund since their arrival in April 2009.
Performance of fund versus sector since April 2009
Source: FE Analytics
Prior to this, the fund was significantly underperforming since launch, thanks largely to a disastrous 2008, which saw it lose 29.47 per cent - almost as much as the FTSE All Share.
The turnaround in performance has not gone unnoticed; according to FE Analytics
, the fund had a huge inflow of capital in the third quarter of 2011. During August last year, the size of the Henderson Sterling Bond fund increased by 82.71 per cent.
The fund is massively overweight the UK, with 99.80 per cent of its assets in the region. The remaining 0.20 per cent is held in the money market.
All the funds in the list have a minimum investment ranging from £500 to £1,000 and a total expense ratio (TER) between 1.16 per cent to 1.51 per cent.
For investors looking for more specialised portfolios, industry experts recently tipped the AXA US Short Duration, Rathbone Ethical Bond, and Investec Emerging Market Local Currency Debt funds as good alternatives to these better known bond funds.