Hodges, also head of fixed income at the group, will be replaced by Martin Reeves, manager of the L&G High Income fund since November 2011.
Reeves track record is comparatively short, and the £1.5bn L&G High Income fund sits in the IMA Sterling High Yield sector, with a different mandate to L&G Dynamic Bond.
Hodges’ reputation is built on an excellent period during the financial crisis, after his fund limited the losses suffered by the sector in 2008 and doubled the returns of its peers in 2009.
He was also one of the first fund managers to develop the concept of strategic bond funds, which have since become very popular with investors and advisers alike.
Performance of fund versus sector over 7yrs
Source: FE Analytics
The fund was caught out in 2011 but has outperformed in every other calendar year. It currently yields a hefty 4.8 per cent, the highest outside the top quartile of the sector for yield.
Henderson Strategic Bond
The only other fund in the IMA Sterling Strategic Bond sector to have beaten the sector average in each of the last three years and also in 2008 is Henderson Strategic Bond.
The £1bn portfolio is run by FE Alpha Managers John Pattullo and Jenna Barnard, and is also yielding much more than the L&G fund at 5.8 per cent.
Pattullo has been managing the portfolio since 1999 and was joined by Barnard in 2006.
Over the past seven years, a period that includes the financial crisis, the fund has returned 46.06 per cent compared to 39.16 per cent for the sector average.
Performance of fund versus sector over 7yrs
Source: FE Analytics
The main difference between the funds is that the Henderson portfolio is much more international, with 46.73 per cent in the UK compared to the 89.99 per cent of the L&G fund. Henderson Strategic Bond has 27.75 per cent in Europe and 7.8 per cent in the US.
Charges on the Henderson fund are 0.72 per cent on clean share class basis, while on the L&G fund they are just 0.63 per cent.
Henderson Strategic Bond, like L&G Dynamic Bond, is on the FE Select 100 list of top funds.
M&G Optimal Income
Buying M&G Optimal Income would hardly be an original move – the fund is now £18.8bn in size, having taken on £4.8bn in the past 12 months alone.
However, the popularity of FE Alpha Manager Richard Woolnough’s portfolio is built on a strong track record. He also beat the sector average in 2008, with the fund down 4.34 per cent compared o losses of 13.54 per cent for the sector.
The recovery year of 2009 wasn’t so spectacular for the manager, however, although he did produce top quartile returns in 2011 when Hodges’ fund faltered.
Performance of fund versus sector over 7yrs
Source: FE Analytics
The main issue with the fund is its size, however, with some commentators suggesting it is so big that its freedom of movement is severely restricted.
Woolnough himself admits that his ability to pick stocks is restricted as he can’t take meaningful positions in issues below a substantial size.
The fund remains weighted towards the higher quality end of the market, with 48.9 per cent in investment grade and 28.6 per cent in high yield.
Partly as a result of this the yield is only 2.73 per cent, which may not be enough for some.
The L&G fund has 56.72 per cent in high yield while the Henderson fund has 46.5 per cent.
M&G Optimal Income is also on the FE Select 100.
Jupiter Strategic Bond
A higher-yielding option is the £1.9bn Jupiter Strategic Bond fund, which has five FE crowns and is managed by FE Alpha Manager Ariel Bezalel.
The fund is yielding 5.3 per cent thanks to the manager’s willingness to look for opportunities in relatively unknown areas of the market.
Bezalel bought into Greek and Cypriot debt at the end of last year and also bought into rig financing schemes to help boost his yield.
This has helped the fund produce top quartile returns on a total return basis over one, three and five year periods. The fund launched in summer 2008 and has returned 82.26 per cent since then against a sector average of 42.21 per cent.
Performance of fund versus sector and index since June 2008
Source: FE Analytics
The fund has taken on more money over the last year than any other in the sector with the exception of M&G Optimal Income. It is also on the FE Select 100 list of elite funds.
Fidelity Strategic Bond
At the more cautious end of the spectrum is the £1.4bn Fidelity Strategic Bond fund, managed by FE Alpha Manager Ian Spreadbury.
The fund is yielding just 3.35 per cent, and is more cautiously positioned in investment grade debt, with 64.91 per cent in that sector.
Spreadbury’s bearish views mean he thinks bond funds should be positioned for low rates and low growth, and the fund has an effective duration of 6 years, meaning it is more exposed to interest rate risk than many in the sector.
The manager warns that some managers are taking on too much risk in alternative credit structures and that core government bond yields are unlikely to rise while growth remains stagnant and debt levels high.
Returns have been around the sector average over the past three years thanks to this defensive positioning. The fund is also a member of the FE Select 100.