FE Alpha Manager Richard Hodges says the returns available from bonds are inadequate for young investors, despite heading up a fixed interest fund himself.

Hodges, who manages L&G Dynamic Bond, says the long-term potential of equities makes them a more appropriate investment for younger people trying to maximise their eventual pension pot.

"Nobody under 40 should be investing in bonds," he commented.

"There’s no value in safe haven UK, US or German bonds, but I keep buying them because I can’t bring myself to buy anything else. All I do is de-risk, and I need to de-risk some more."

IMA figures show IMA Strategic Bond was the best selling sector in March. Hodges says he understands why younger people are being drawn to bonds given the gloomy economic outlook, but believes they are selling themselves short with the modest gains that Strategic Bond funds are aiming for.

These comments come despite the strong performance of the IMA Sterling Strategic Bond sector in recent years. According to data from FE Analytics, it has outperformed the IMA UK All Companies and IMA UK Smaller Companies sectors over five years, returning 20.92 per cent compared with losses of 8.49 per cent and 3.51 per cent respectively.

Performance of sectors over 5-yrs



Source: FE Analytics

After the crash of 2008 the picture changes slightly, with the average IMA Sterling Strategic Bond fund returning 37.18 per cent over three years, similar to the UK All Companies sector’s 35.63 per cent and substantially lower than the UK Smaller Companies’ gain of 62.65 per cent.

Hodges’ own fund, L&G Dynamic Bond, has outperformed the IMA Sterling Strategic Bond sector since launch, returning 53.52 per cent  – almost as much as the average gain in IMA UK Smaller Companies, which was the best-performing IMA sector over the period.

Performance of fund vs sector over 5-yrs



Source: FE Analytics

The strong showing during both rising and falling markets explains the sector's popularity among cautious investors.

AWD Chase de Vere’s Patrick Connolly said: "We agree with the concept of using strategic bonds."

"There is one important proviso: you have to understand exactly how the manager runs the fund. Some are quite conservative and some take more risk, so you have to pick the right fund and perhaps the right blend of funds."

Hodges says strategic bond managers have the perfect level of flexibility to allow them to navigate today’s difficult markets.

Philip Milburn, manager of the Kames Strategic Bond fund, agrees with him, saying: "Strategic bonds give you the flexibility to do whatever you like."

"The ability of strategic bond funds to use all the tools available must be better than just a single manager trying to beat a single market."