With interest rates at historic lows and inflation creeping towards the 5 per cent mark, nimble Sterling Strategic Bond funds are proving increasingly popular with investors who want protection from rising interest rates and credit risk.
Low yielding government and investment-grade corporate bonds are more vulnerable to movements in inflation and interest rates, and while high yield corporate bonds offer investors the potential for better returns, they always carry risk.
With a Sterling Strategic Bond fund, investors are able to get exposure to a diversified range of assets with a reasonable yield. The IMA definition of a Sterling Strategic Bond places no limit on the degree of exposure a fund can have to any particular type of bond, so the manager is completely free to move in and out of securities if the macro situation changes.
One fund that has attracted particular attention is Trustnet Alpha Manager Richard Woolnough’s M&G Optimal Income fund, which has received inflows of just over £710m in the last three months alone, according to data from Trustnet. The fund’s assets under management (AUM) currently stand at £3.95bn.
According to Financial Express data, IMA Sterling Strategic Bond has returned 19.37 per cent in the last three years, underperforming IMA Sterling High Yield, Sterling Corporate Bond, UK Gilt and Global Bonds. It was also more volatile than IMA UK Gilt and Sterling Corporate Bond over this period.
Performance of sectors over 5-yrs
| Name | 1-yr returns (%) |
3-yr returns (%) |
5-yr returns (%) |
| IMA Sterling High Yield |
13.61 | 30.16 | 34.88 |
| IMA Sterling Strategic Bond |
7.31 | 19.37 | 19.92 |
| IMA Sterling Corporate Bond |
5.97 | 19.82 | 16.08 |
| IMA UK Gilt |
2.85 | 20.94 | 25.07 |
| IMA Global Bonds |
2.48 | 36.58 | 47.03 |
Source: Financial Express Analytics
However, Sterling Strategic Bond funds have fared better than their rivals since fixed interest returns slowed in 2010. In the last year, only IMA Sterling High Yield has returned more than Sterling Strategic Bond. Moreover, it was the second least-volatile sector during this time, beaten only by IMA Global Bonds – the worst-performing bond sector in the last 12 months.
Of the 68 funds in the sector, Invesco Perpetual Monthly Income Plus is consistently the best performer. The £3.43bn fund tops the sector over five- and 10-year periods, with returns of 38 and 99 per cent respectively, and is second only to Baillie Gifford Corporate Bond over one year.
Performance of fund vs sector over 5-yrs
Source: Financial Express Analytics
However, the fund’s impressive returns have come at a price. Invesco Perpetual Monthly Income Plus is one of the most volatile funds in the sector, and lost 10 per cent more than the sector average in 2008.
Woolnough’s M&G Optimal Income fund, which was only launched in December 2006, is the biggest fund in the sector. It is the second-best fund by performance over three years, with returns of 41 per cent, and is less volatile than the average fund in Sterling Strategic Bond.
Other notable performers include the £1.13bn Henderson Strategic Bond fund and the £1.57bn L&G Dynamic Bond fund.
At the other end of the scale is AXA Sterling Strategic Bond, which is the only fund that has lost investors money over five years, with returns of -2.67 per cent. It is also the worst-performing fund over three years. Performance has improved in the last year however; newly appointed manager Nick Hayes has marginally outperformed the sector average, and with less volatility.