It’s no secret that the fixed income space has endured a tough time recently, given that unusually loose monetary policy has warped yields and boosted prices within the asset class.
Given that bonds have been traditionally known as a ‘safe’ asset class, this has led many investors to puzzle over how to achieve risk diversification in their portfolios. Not only this, the historically long market cycle has left investors wondering whether the 30-year bond bull run could finally come to an end.
This sentiment was demonstrated in FE Trustnet’s poll last week, which found that approximately 70 per cent of readers are underweight fixed income and more than 98 per cent believe a bond bear market is possible.
Performance of sectors since 1990
Source: FE Analytics
When drilling down to individual bond funds though, there are a number that have delivered consistently strong returns despite today’s challenging environment.
One of these is Chris Higham’s Aviva Investors Strategic Bond portfolio, which has an AUM of £439m – this means it could be under some investors’ radars given that several of its peers in the IA Strategic Bond sector are well over £1bn in size.
Higham’s fund was launched in September 2008 and since then, it has provided a total return of 94.91 per cent, outperforming its sector average by 38.78 percentage points.
Performance of fund vs sector since launch
Source: FE Analytics
On an annualised basis, it has delivered a top-quartile return during three out of seven years to the end of 2015 and has been above average every year since launch with the exception of 2011. 
It has also done well in terms of its risk metrics, having delivered a top-quartile annualised volatility and Sharpe ratio, which measures the fund’s risk-adjusted returns, over the same time frame.
Speaking at the FE Trustnet Select Fixed Income event last week, Higham (pictured) said that one of the key differentiators between himself and his peers is the high concentration of his portfolio – the fund currently has 90 holdings while many others in the sector hold in excess of 500.
“It’s high conviction but well-diversified as every one of these positions is different. You might see managers with a large number of holdings but they have 10 per cent in a certain market whereas every one of our holdings is differentiated,” he explained.
“In terms of asset allocation it is unconstrained and about a third of our performance has come from asset allocation and two-thirds from stock selection. When you look over our returns it has been a fairly consistent outperformance, I think that’s the difference in terms of our philosophy and our approach.”
The fund has a turnover of 25 per cent and as such, each position is selected to be held over the long-term.
As Hawksmoor’s Daniel Lockyer points out, Higham takes a more unusual approach when it comes to selecting these holdings as he favours companies that are good underlying businesses but have weak balance sheets as Higham says that, while balance sheets can be improved, the underlying quality of the businesses can’t.
“This means the bonds are typically lower rated and therefore cheaper at the time of purchase and have potential to be rerated,” Lockyer explained.
AXA Wealth’s Adrian Lowcock adds that, while a majority of the fund’s performance derives from stock selection, his eye for lucrative companies could be hidden by the fund’s current similarity to the benchmark (it is pitted against the IA Sterling Strategic Bond sector average).
For instance, both the fund and the sector average have very similar regional weightings in the UK and Europe.
“Higham is overweight the euro and sterling as the spread between the US treasuries against German bunds is at its highest level in over 30 years,” Lowcock said.
“Higham is underweight in the energy sector as it suffers from the oil price collapse and high issuance of high yield bonds in this sector – around a $1trn which he believes will largely be written off over the next few years. This is because he prefers more stable returns at lower risks not high-risk high-yields.”
Another differentiator between the manager and his peers is his focus on total return. Given the current environment, Higham says that investors should expect a majority of the fund’s returns to come from income given the today’s challenging environment.
“You won’t see us with a negative duration figure or short positions. That is a pretty key difference between us and a lot of strategic bond funds,” the manager said.
“The basic portfolio theory is that you can achieve a high return with the same amount of risk [as the market] or the same return for a lower level of risk. Why do we have a flexible, total return mandate? It’s about moving that criteria efficiently.”
Ben Willis, head of research at Whitechurch Securities, says that the fund’s flexibility is a particularly desirable trait as it enables the manager to construct a portfolio of his best fixed interest ideas up and down the risk spectrum and across global bond markets.
“We do not invest in the Aviva Strategic Bond fund, but it is one that we keep an eye on and we rate Chris Higham,” he said.
“The fund is nimble and, at just under £500m in size, can continue to be high conviction in relatively illiquid bond markets. In essence, with these types of funds you are buying the manager and Chris Higham’s track records suggests he is very capable of unlocking the opportunities within bond markets.”
Lockyer says that Higham’s straight-forward total return approach is simple for investors to understand and says that this, combined with its performance track record and metrics, makes the fund a desirable holding.
“Higham is the sort of man you would want to manage your bond fund - sensible, straight forward and honest,” he said.
Performance of Higham versus peer group composite
Source: FE Analytics
“I also like this fund as it sits between a plain corporate bond and a strategic bond fund, so it can do more than a corporate bond fund but is not going to do anything drastic or weird.”
“As a house I think Aviva is improving following Euan Munro's arrival a couple of years ago, so Higham has a higher quality of colleague to feed off.”
Aviva Investors Strategic Bond has a clean ongoing charges figure of 0.63 per cent and yields 3.9 per cent.
