The £1.5bn L&G Dynamic Bond fund is the best performer in its sector over five years and the manager’s approach makes it well-suited for investors who want balanced exposure to the fixed income market.

Funds in the Strategic Bond sector are free to invest across the whole range of fixed interest assets from the lowest-risk government and investment-grade corporate bonds right up to high-risk emerging market debt and junk bonds marked BBB- or lower. Managers are also free to invest up to 20 per cent in equities if they so wish.

This freedom was originally intended to allow investors to outsource asset-allocation decisions within the fixed income portion of their portfolio to Strategic Bond managers.

However, one of the criticisms levelled at the sector is that the majority of funds are simply chasing the highest returns rather than diversification and commentators such as Hargreaves Lansdown’s Mark Dampier have dubbed them "high-yield bond funds in disguise".

Richard Hodges, manager of the L&G Dynamic Bond fund, takes a different approach.

"Dickie Hodges is much more active than a lot of the other managers in his peer group," said Gary Potter, co-head of multi-manager at Thames River.

"He likes to look for a hedge that allows him to take on risk. Rising markets present opportunities for him but he tends to be a bit middle-of-the-pack when markets are flat."

Data from FE Analytics shows that the fund has returned 52 per cent over the last five years, more than any of its peers in the Strategic Bond sector.

Performance of fund vs sector over 5-yrs



Source: FE Analytics

It has achieved this stellar return while taking on only marginally more volatility than the average fund: 8.07 per cent annually compared with 7.17 per cent from the sector.

More recently the fund has had a slightly tougher time, returning 34.38 per cent over the last three years, marginally less than the average fund in the sector.

"We came out of the fund three or four months ago," commented Potter. "That’s not to say we don’t believe in the manager, we’ve just been worried that he’s been less dynamic in recent months. It’s seen a lot of inflows and we wanted to see how he coped with the size of the fund. It’s actually had a better time than we thought it would."

In the last two years the fund has grown from around £230m to £1.5bn.

A recent FE Trustnet article highlighted how much of the money flowing into the highly popular sector has gone into Richard Woolnough’s M&G Optimal Income fund. However, L&G Dynamic Bond offers investors something a little different.

Hodges is happy to hold large portions in riskier assets against a backdrop of low interest rates.

"Clearly we’re in an environment where government debt has a greater degree of volatility so I’m not critical of the amount of high yield we’ve had," said the manager.

L&G Dynamic Bond has a minimum investment of just £500 and a TER of 1.43 per cent.

Investors interested in adding to their exposure in the Strategic Bond sector may also wish to consider the £1bn Henderson Strategic Bond fund, which Potter holds in his Thames River Distribution portfolio.