Fixed income funds have often acted as an anchor against equity market volatility within a portfolio, but given that yields are at very low levels and there is the prospect of higher interest rates in the US and UK, investors are increasingly turning to funds with a greater degree of flexibility.
This means funds within the IA Sterling Strategic Bond sector are becoming increasingly popular with investors as managers within that space have the ability to dip into all parts of the bond market – and even equity market – for income, capital growth and protection.
Clearly, there are concerns that the next five years could be very different for bond managers than the last half-decade has been, but in this article we look at which funds in the strategic bond sector have been the best at dampening down volatility in an investor’s portfolio by posting the most positive monthly returns over that time.
Source: FE Analytics
As the table above shows, Bezalel’s four crown-rated fund has topped the list with 50 positive months out of a possible 60. The average fund in the sector has achieved 43 while its benchmark – the iBoxx Sterling Non Gilts All Maturities index – has delivered just 41.
However, while Jupiter Strategic Bond has been the most consistent monthly performer, it has had some hefty short-term drawdowns over that time such as in May 2010 when it fell 3.7 per cent and in June 2014 when it lost close to 3 per cent.
That being said, no fund in the sector made money in June 2014 as it was when the market was in free-fall after the US Federal Reserve warned it would ‘taper’ quantitative easing.
Nevertheless, the consistency of those returns has meant the fund has been a top quartile performer in the sector over a cumulative five-year period with returns of 47.04 per cent – though it has slightly underperformed against its benchmark over that time.
Performance of fund versus sector and index over 5yrs
Source: FE Analytics
It has also been top quartile for its annualised volatility, risk adjusted-returns as measured by the Sharpe ratio and its maximum drawdown, which shows the most an investor would have lost if they had bought and sold at the worst possible times over the last five years.
The fund has historically had a high weighting to higher yielding bonds combined with safer haven assets like Australian government bonds.
However, the manager has moved the fund, which now yields 4.5 per cent, into a more defensive position as investors “are entering an uncertain period for bond markets and are positioned accordingly”.
It features on the FE Select 100 as the FE Research team rate Bezalel highly.
“Bezalel has taken full advantage of his unconstrained mandate. By varying the portfolio’s allocation to government bonds or high or low-rated corporate bonds according to his assessment of the economy, he has generated outstanding performance since the fund’s inception,” the team said.
In joint second are AXA Framlington Managed Income and Ecclesiastical Amity Sterling Bond, which have both made money in 48 out of the last 60 monthly periods.
George Luckraft’s five crown-rated fund has also been the fifth best performing portfolio in the sector over five years with returns of 56.99 per cent, though it is second quartile for its annualised volatility and is third quartile for its maximum drawdown – possibly because of its performance during the summer and autumn of 2011.
However, since the Fed-induced sell-off in bonds in June 2013, the fund has posted a negative return in just one of the last 19 calendar years.
Monthly performance of fund since July 2013
Source: FE Analytics
Though it has performed well on a monthly basis, from a capital growth point of view Chris Hiorns and FE Alpha Manager Robin Hepworth’s £83m Ecclesiastical Amity Sterling fund hasn’t looked particularly exciting as it has only narrowly outperformed the sector over five years with returns of 39.46 per cent.
On the other hand, it has been among the best 10 funds in the sector for its risk-adjusted returns and annualised volatility over that time.
Other funds to have featured on the list of most consistent monthly performers are City Financial Diversified Fixed Interest, Eric Holt’s five crown-rated Royal London Sterling Extra Yield Bond and FE Alpha Manager Richard Woolnough’s mammoth £24bn M&G Optimal Income funds, which have all delivered positive returns in 47 out of the last 60 calendar months.
Woolnough’s macro-driven approach also means the fund has been the sector’s second best performing portfolio for both returns and its maximum drawdown over the last five years.
However, one interesting fact which came out of the study is that strategic bond funds haven’t had to be consistent to deliver long-term outperformance.
Ian Bates and Nicolas Trindade’s AXA Sterling Long Bond has been the least consistent monthly performer as it has posted negative returns in 23 of the last 60 months. It has also been bottom quartile for its maximum drawdown and annualised volatility.
However, it has been the sector’s third best performing portfolio over a cumulative five-year period with returns of 68.54 per cent.
Most of those returns have come about more recently, however, as following changing expectations over interest rate rises and falling bond yields, funds with longer duration assets – such as the AXA Framlington fund – have flourished.
Performance of fund versus sector over 1yr
Source: FE Analytics
The fund has returned a staggering 28.71 per cent, which is four times greater than the sector’s gains over that time.
The only fund to outperform AXA Sterling Long Bond over that time is Pimco GIS UK Sterling Long Average Duration, which is up a hefty 32.74 per cent as investors piled back into long-duration assets.
