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How the IA Sterling Strategic Bond sector could be split

FE Trustnet looks at the ways the IA Sterling Strategic Bond sector could be broken down to make it easier for investors to understand.

Jonathan Jones

By Jonathan Jones, Reporter, FE Trustnet
Friday June 16, 2017

There are a number of ways in which the IA Sterling Strategic Bond sector could be improved to reduce confusion, according to investment commentators, with a new name or sub-sectors based on asset class or geographical splits being among the suggestions.

FE Trustnet recently asked readers which Investment Association sectors could do with an overhaul. While IA Sterling Strategic Bond received the fewest votes, it’s clear that some have problems with the sector and the actual name of the peer group was highlighted as potential confusion by investment professionals.

Other criticism centre on the fact that the peer group – which is one of the largest in the Investment Association universe – is home to many funds with different aims and areas of focus, which makes it difficult for investors to compare members.

Recent research by FE Trustnet found that almost half of investors view benchmark comparisons as the best way to judge a fund’s performance. But given that sectors are often used as a starting point for research, professionals argue that more specialised sub-sectors could be a step in right direction.


Source: FE Analytics

This is something we have been taking a close look at over the last few weeks as, while the Investment Association has been mulling a new mid-cap sector in an effort to make the IA UK All Companies sector a bit clearer, we ask if there are other sectors they would like to see amended.

Having looked at the most popular IA Targeted Absolute Return sector and the IA Mixed Investment sectors, below FE Trustnet looks at the IA Sterling Strategic Bond sector.

According to Investment Association rules, the sector is for funds which invest at least 80 per cent of their assets in sterling-denominated (or hedged back to sterling) fixed interest securities. Members have freedom to invest across the fixed income spectrum, but convertibles, preference shares and permanent interest bearing shares are excluded from being part of the 80 per cent.

Looking at the sector compared to the more easily-defined IA Sterling High Yield, IA Sterling Corporate Bond and IA UK Gilts, it has performed better than only the gilt sector over the last five years.

Indeed, it has underperformed the high yield sector by 6.31 percentage points and is 4.47 percentage points behind the corporate bond sector.

Performance of sectors over 5yrs


Source: FE Analytics

Darius McDermott, managing director at Chelsea Financial, said he can “fully appreciate” why the sector frustrates people.

“It really is an ‘other’ bond sector maybe strategic is the wrong name for it but it is the sort of place where funds say they want more flexibility and some of them are quite low risk and some are quite high risk,” he said.

“Not all the funds are strategic, some are very structurally overweight high yield and some will only go to 30 per cent high yield so you are not comparing like-with-like and that does make things very difficult.

“‘Other bond’ is what that sector used to be called back in the day and I don’t know what the right name for it is but I do understand why people have voted for it to potentially change.”

However, McDermott said it is a sector that he struggles to have a strong opinion about, noting that it is down to the fund researcher or investor to be able to delve deeper into individual funds.

Financial services specialist The Wisdom Council agreed that a name change could help, suggesting ‘multi-strategy’ as a new name for the sector.

“Fixed income is esoteric for retail investors who are less familiar with this asset class and the distinctions within it,” they said.

“To all but experienced investors I think that ‘strategic bond’ would sound neutral, generic and not really give an indication of the fund’s investment strategy.”

However some believe that splitting the sector may be the way forward, with it surprising that there are a lot more equity sectors than there are bond sectors. 

“Strategic bond is quite a strange one. There are some definite anomalies,” Ben Yearsley, director at Shore Financial Planning, said.

“It feels weird that there are only five bond sectors but loads of equity ones. It feels like investment grade and high yield are well defined then everything else just goes into strategic.

“Maybe the delineation needs to be around how much flexibility, a bit like the mixed sectors, i.e. either on geographical lines or amount they have to have in say Investment grade.”

Psigma senior investment analyst Dan Adams doesn’t use strategic bond funds in his portfolios, but said that the Investment Association should look to break up the fixed income sectors in a similar way to the breakdown he uses. 

“Within fixed income we break it down into sovereign debt, credit and then within that it is split between investment grade and high yield and then inflation linked,” he said.

“I don’t think there’s a huge amount of value in the strategic bond sector unless you are genuinely investing in a ‘strategic’ bond fund of which there are only a few.

“The trouble with the sector is there is a lot of funds that have specialised in certain areas that shouldn’t be in that bucket.

“Having a strategic bond fund in a strategic bond sector makes complete sense but it is the funds in that sector that don’t fit into that bucket and that’s why we break them out.”

Instead, Adams uses individual funds to break down the components of a strategic bond fund, including high yield, investment grade and government bond funds rather than a dedicated strategic bond fund.

But he said that the sector as well as the other fixed income sectors, could be brought more up to date.

“There’s been so much evolution in the fixed income market over the last 10 years it probably justifies that,” he said.

“Prior to the financial crisis you only had government bonds and corporate debt and now you’ve got various types of esoteric credit and the market has exploded so I think having a similar number of categories to equities makes sense. “

However, Chelsea Financial’s McDermott, said the fund researcher need to look under the bonnet of individual funds to determine which is right for them or their client.

“It is down to the investment expert to be able to delve deeper into those funds. I have sympathy with the IA on some of these issues. You might just end up with lots of sectors with very few funds in them,” he said.

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Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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