Out of the five sterling fixed interest sectors, only the higher-risk High Yield Bond sector performed worse than the Sterling Strategic Bond sector in 2011.
Strategic Bond funds must have 80 per cent of assets in sterling-denominated – or hedged back to sterling – fixed interest securities, but the restrictions are no tighter than that.
The added freedom afforded to fund managers by the absence of a credit-quality restriction is supposed to allow them to adjust their portfolios to better capture the prevailing economic themes. Managers are free to invest across the credit spectrum from government bonds to high yield and can even have 20 per cent in equities.
However, Mark Dampier, head of research at Hargreaves Lansdown, says the freedom to invest across a broad range of assets is not much good if managers miss opportunities. Strategic Bond funds struggled last year as more focused fixed interest funds – gilts in particular – prospered.
"Strategic Bond managers have not been strategic enough," he said. "I’d criticise them heavily for not buying gilts properly."
Investors flocked to these flexible products last year when the macroeconomic outlook became uncertain. Figures from the Investment Management Association show that it was the second best-selling sector behind Cautious Managed in 2011.
"Most members of the public – and most intermediaries – want the flexibility of a Strategic Bond manager who should be able to do better," continued Dampier. "The majority of these managers said gilts looked expensive at 5 per cent according to the normal credit cycle, and then they went to 4 per cent and they said they were still too expensive, and then they went down below 3 per cent."
"As an adviser I’ve been very disappointed. I appreciate it hasn’t been easy but the many managers have been too closed-minded to the vacuum of risk versus return that investors have been after this year. This has been a year for giving a return of people’s money, not getting a return on people’s money."
Performance of sectors over 1-yr
Source: FE Analytics
Data from FE Analytics shows that the average Sterling Strategic Bond fund returned 2.71 per cent in the last 12 months while the average Corporate Bond fund returned 4.36 per cent and the UK Index-Linked Gilt sector returned an average of 21.25 per cent.
Tim Cockerill, head of collectives research at Rowan Dartington, says he can sympathise with the managers to some extent because 2011 was unlike any other year. However, the strategies adopted by Strategic Bond managers still raise questions.
"Everyone has had to sit around waiting for politicians," he said. "Managers are used to looking at fundamentals and making calls on interest rates but last year sentiment – even the whole investment landscape – could swing on the whim of a comment from a policy-maker."
"But if the market is that difficult then I would ask why haven’t they been more defensive?"
Funds that focus on longer-dated certificates have performed the best in 2011. UBS Long Dated Fixed Interest UK Plus is the standout performer with returns of 25.13 per cent over the last 12 months.
At the other end of the spectrum, the performance of funds that were heavily exposed to bank credit lost up to 12 per cent of their value.
The most notable example is Paul Read and Paul Causer’s Invesco Perpetual Tactical Bond fund, which has lost 7.44 per cent in the last 12 months. Read defended his strategy back in October.