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Square Mile's top-rated strategic bond funds for choppy markets

04 November 2014

As volatility returns we evaluate the strategic bond funds investment research group Square Mile rates to battle uncertainty.

By Daniel Lanyon,

Reporter, FE Trustnet

Last week, it was not long after one central bank – the Federal Reserve – stopped printing money before another – the Bank of Japan – upped its own quantitative easing (QE) programme in a move that shocked markets and sent equities soaring.

While the scale and extent of the end of QE’s effect on the bond market is at best a guess, investors who depend on a fixed income from their holdings may wish to assess their funds for their credentials in downside protection.

The following four bond portfolios are all top rated by fund research group Square Mile and have an FE Alpha Manager as well as being highlighted for their strength in weaker markets.


Fidelity Extra Income

ALT_TAG Given an ‘AAA’ rating by Square Mile, this is a top rated strategic bond fund that also has an FE Alpha Manager – Ian Spreadbury (pictured) – at the helm.

Square Mile says Spreadbury is an experienced manager who has built up a strong reputation for successfully managing fixed income funds over a number of market cycles, generating good long-term returns for his investors.

“He has established a prudent and well-considered investment approach that looks to ensure the fund is well diversified and should meet its income objective in a broad range of economic scenarios,” Square Mile said.

“Given the investment approach and the focus on risk, the fund tends to perform in a relatively defensive manner in comparison to its benchmark, underperforming in strongly rising markets but outperforming when corporate bonds perform poorly.”

“The fund is likely to be suitable for investors seeking a variable income stream, higher than that available on the investment grade corporate bond market, with a relatively defensive return profile.”

According to FE Analytics, the £449m fund has returned 48.77 per cent over the past five years compared to an IMA Sterling Strategic bond sector average of 37.2 per cent.

Performance of fund and sector over 5yrs

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Source: FE Analytics


While this is a comfortable 10 percentage points ahead of the sector, Spreadbury has performed better over the longer term relative to his peers. Over 10 years the fund is 7th in the sector, up from 15th over five years and moving from second to top quartile.

The past year has also been a top quartile year for the fund, in part thanks large holdings in UK gilts which rallied this year.

Approximately, 70 per cent is in other UK fixed interest while the rest is spread across global debt.

Its current yield is 4.08 per cent and the fund has an ongoing charges figure (OCF) of 0.78 per cent. It pays out a monthly basis.


Fidelity Strategic Bond

Spreadbury has run this £1.5bn fund for slightly less time than the previous fund, starting in 2005 rather than 2002.

However, its returns have beaten the Fidelity Extra Income fund since its launch.


It has returned 76.16 per cent since April 2005 compared to 68.59 per cent. The sector average over this period was 53.45 per cent.

Performance of fund and sector since April 2005

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Source: FE Analytics

Square Mile, which rates it at ‘AA’, says in addition to being better suited to weaker markets and when corporate bonds are performing poorly, the fund offers the potential for some capital growth over a full market cycle.

However, it says investors should be prepared to hold the fund for a full cycle in order to take advantage of the rotation of asset allocation through different parts of the market.

Its current yield is 3.63 per cent and it has an OCF of 0.68 per cent. It pays out a monthly basis.


Henderson Strategic Bond


This £1.2bn fund has been a long-term top performer and has one of the longest running managers in the sector – FE Alpha Manager John Pattullo. In charge since 1999, he was joined in 2006 by another FE Alpha Manager, Jenna Barnard.

Square Mile says the pair have proved themselves skillful at managing macroeconomic, market and downside risks over a range of market conditions. It gives the fund an ‘AA’ rating.

“The thoughtful process and flexible mandate mean that the fund should be well positioned to benefit in varying economic scenarios,” it said.

“The fund tends to have a focus on corporate bonds and is therefore likely to perform strongly when these markets are rising, but this can be at the expense of performance in falling markets.”

“It may be suitable for investors seeking a mixture of income and capital growth over a market cycle, but who are prepared to accept a degree of capital volatility, particularly over the shorter term.”

Over the past 10 years it has returned the 6th best return in the sector, 73.57 compared to a peer group average of 58.08 per cent.

Performance of fund and sector over 10yrs

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Source: FE Analytics

Its current yield is 5.1 per cent and it has an OCF of 0.7 per cent. It pays out a monthly basis.


M&G Optimal Income

Being one of the largest funds in sector has made FE Alpha Manager Richard Woolnough’s £23bn fund contentious about its ability to find value across enough holdings.

Square Mile says this has made the fund more difficult to manage at certain times and has given it a ‘AA’ rating.


“Whilst this fund has the advantage of being able to invest across fixed income markets, it will usually have a significant proportion of its assets invested in corporate bonds, and the reduced flexibility that this weight of assets brings, is reflected in our rating of the fund.”

“Given the focus on downside risk, the fund tends to have a fairly defensive return profile, outperforming when markets are troubled or falling, but lagging slightly during periods of strong market returns.”

“We believe the fund may be suitable for investors who are looking for a secure source of income and the flexibility to move through fixed income [and, to a certain extent, equity] markets.”

Over the past seven years, often seen as encompassing a full market cycle, the fund is the best performer of these four funds. It has returned 83.54 per cent, more than double the average in the sector.

Performance of fund and sector over 7yrs

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Source: FE Analytics


Its current yield is 3.25 per cent and it has an OCF of 0.91 per cent. It pays out a monthly basis.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.