Bond investors who are concerned about the future of interest rates should pair up Jupiter Strategic Bond and TwentyFour Dynamic Bond due to the managers’ differing views on the market, according to the team at Whitechurch Securities, who are doing just that in client portfolios.
The outlook for fixed income has become increasingly uncertain with many predicting the end of the asset class’ multi-decade bull run as yields are so low, economic activity seems to be improving and there is talk of interest rate rises in the US.
Many have been expecting the bond market to fall out of bed for a number of years now, of course, only for the reverse to happen thanks to falling inflation expectations and various macroeconomic headwinds.
That has certainly been the case in 2015 as while sovereign bond yields spiked in the early months of the year, they contracted once again as equity markets were hit by a China-led sell-off.
Performance of indices in 2015
Source: FE Analytics
However, with equities rallying from their August lows and some distinctly more dovish comments out of the US Federal Reserve regarding future monetary policy, bonds have posted losses over recent months.
This backdrop is a very frustrating one for bond investors, though, as opinions around interest rates differ widely from manager to manager with some saying such an event will cause a significant sell-off, others saying it will have minimal impact and many expecting it not to happen at all.
Given this difference of opinion among bond market commentators but given the fact that many investors still need fixed income exposure, Whitechurch is combining two funds together to cover the bases and protect its clients.
“What is clear is that the direction for bond markets remains unclear,” Whitechurch said.
“Bond managers’ views on where interest rates and the direction of global economy are polarising opinions. In recent months we have received updates from two highly regarded bond fund managers that we invest with.”
“They have very different views on how their positioning. Jupiter’s stance is for no US rate rise, deflationary pressures to continue and that the great bond bull market is far from over.”
“On the other hand, TwentyFour Asset Management finds bonds a lot less attractive than they have been for a number of years, the outlook for credit is more negative and they have shortened duration.”
The group added: “We like this dichotomy as the future direction for bond markets remains opaque.”
Both Jupiter Strategic Bond and TwentyFour Dynamic Bond sit in the IA Sterling Strategic Bond sector, meaning they have a great deal of flexibility to try and take advantage of opportunities, or shelter their investors from risks, in the fixed income market.
They have also proven to be two of the most popular portfolios in the peer group with both professional and private investors.
The £2.6bn Jupiter Strategic Bond sector has been run by FE Alpha Manager Ariel Bezalel since its launch in June 2008.
According to FE Analytics, it has been the third best performing portfolio in the sector over that time with returns of 86.69 per cent, beating its iBoxxx Sterling Non-Gilts All Maturities benchmark by more than 20 percentage points in the process.
Performance of fund versus sector and index since launch
Source: FE Analytics
It has also outperformed the sector in five out of the last six calendar years, the exception being 2014 when Bezalel’s view on the market began to change.
The fund had tended to be one of the more ‘risk-on’ in the sector as the manager kept a decent position in corporate credit to play the recovery in the asset class following the financial crisis. Despite its weighting to ‘safe haven’ Australian government, Bezalel ran a more aggressive portfolio as he viewed the global economy as being in a state of recovery.
This meant the fund was typically one of the peer group’s highest yielders. 
However, the manager changed his position at the back end of last year due to his concerns that market were becoming increasingly complacent about weakness in the global economy and growing macro risks.
“For much of this year we have been at the more hawkish end of expectations on US rates, believing the market could be underestimating a potential pickup in growth in the domestic economy,” Bezalel (pictured) told FE Trustnet last year.
“We have recently modified our views on concern that the US economy is not immune to mounting external risks. As a result we have moved into capital preservation mode and have made a number of tactical changes to the fund.”
This means the fund now has “a more cautious stance” with a 25 per cent position in AAA-rated debt, which is largely Australian government bonds, and corporate bonds which “generally have a lower yield but are also deemed lower risk”.
The fund still yields 4.1 per cent, though.
The five crown-rated TwentyFour Dynamic Bond fund, which is co-managed by Eoin Walsh, Gary Kirk, Felipe Villarroel and Pierre Beniguel and is £1.3bn in size, is positioned more for a gradually improving economic backdrop.
The managers firmly believe that the US Federal Reserve will raise rates in December and are therefore running a portfolio which is skewed towards shorter duration bonds and high yield debt, which they say offers decent spreads.
It has always been one of the most genuinely strategic funds in the peer group and the managers’ stock-picking abilities and reactions to macro events have meant TwentyFour Dynamic Bond has comfortably outperformed since its launch in April 2010.
In fact, the fund – which yields 4.96 per cent – has been the sector’s fourth highest returning member over that time with gains of 49.18 per cent.
Performance of fund versus sector and index since launch
Source: FE Analytics
The different positioning of the two funds is shown in their performance this year, as the Jupiter fund is behind the TwentyFour offering largely due to the rout in government bond markets earlier in the year and the sell-off in sovereign debt since late October’s FOMC meeting – when the US Federal Reserve dropped its biggest hint yet that it would tighten policy.
TwentyFour Dynamic Bond’s low duration and high yield exposure has carried the fund well this year, however.
Nevertheless, with the caveat the past is no guide to the future, the two have paired up well from a historical point of view.
An equally-weighted portfolio of the two, for example, has beaten the sector by close to 15 percentage points over five years, albeit with a higher maximum drawdown and annualised volatility.
Performance of ‘pairing’ versus sector over 5yrs
Source: FE Analytics
It is also comfortably ahead of the sector in 2015’s troubled market, which is arguably a fairer reflection of how the funds could work together given that for most of the past five years Bezalel had run a far more aggressive portfolio.
Jupiter Strategic Bond has an ongoing charges figure is 0.73 per cent while TwentyFour Dynamic Bond is slightly more expensive at 0.81 per cent.
