Hodges, who runs the £1.7bn L&G Dynamic Bond fund, says that only eight out of a possible 69 funds in the IMA Sterling Strategic Bond sector can actually be classed as strategic, and the rest just concentrate on a small area of the market. He adds that this could have serious consequences for investors who are not aware of the limitations of their fund and think they are buying something more flexible.
"Investors really ought to be thinking about this," he said. "It will cause real problems down the line as the wrong investors will be in those funds for the wrong reasons."
"Strategic Bond funds should not be generating returns from just government bonds, corporate bonds, interest rates, high yield or derivatives."
"They should be generating efficient returns from a dynamic approach."
Hodges says that the popularity of the Strategic Bond sector has led many fund houses to put more specialised funds in there to attract higher inflows.
"The Strategic Bond sector has been growing and so more funds have been launched to capture those inflows; I think there are just eight funds that actually should be in it," he continued.
"Others just jumped on the bandwagon – they just wanted inflows – and it annoys the living daylights out of me."
"Most of them are not strategic bond funds at all, there are funds that have 'long duration' in their name and are never going to look at any other part of the fixed income market. It’s the same with high income funds, they are always going to be in high yield."
"They will only generate returns in the right environment, so yes they do have greater upside potential than most, but of course they are not protected on the downside."
IMA rules say that every member of the Sterling Strategic Bond sector must invest at least 80 per cent of its assets in fixed interest securities that are either sterling-denominated or hedged back to sterling.
However, there is no requirement to be diversified and the IMA notes that at any point in time the asset allocation of the fund could theoretically place the fund in one of the other fixed interest sectors.
Therefore, as long as the manager says the fund can invest across the fixed interest spectrum, it can sit in the Strategic Bond sector.
An example of a fund in the sector that focuses on one area of the market is the five crown-rated Baillie Gifford Corporate Bond fund.
The fund, which is currently yielding 4.2 per cent according to data from FE Analytics, invests almost exclusively in corporate bonds while retaining a significant holding in asset-backed securities.
It is managed by Stephen Rodger and Torcail Stewart and is a top-quartile performer over three, five and 10 years.
AXA Sterling Long Bond is another example, focusing mainly on longer-duration bonds.
It currently holds 64 per cent in the gilt market, but also invests in corporate bonds.
The fund is also top quartile over three years and is currently yielding 3 per cent.
Hodges says he likes to "use all the tools" on his L&G Dynamic Bond fund and tries to generate returns from both rising and falling yields and volatility.
He currently has two-thirds of the portfolio in financials, with much of that in lower tier-two banks and insurers. Another third is in high yield.
Hodges uses a number of tactical short positions in the L&G Dynamic Bond fund, which he says lets him contain volatility and add additional revenue.
L&G Dynamic Bond has exposure to UK inflation-linked bonds, plus sovereign debt issued by Spain and Italy.
This approach has produced good results over five years: its returns of 74.96 per cent make it the best-performing fund in the sector over this time.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Although the manager says there are only eight actual strategic bond funds around, he declined to comment on which portfolios he felt deserved to be in the sector.
Richard Troue, investment analyst at Hargreaves Lansdown, says Hodges makes a fair point and that he would like to see some strategic bond managers make more use of their flexible mandate.
"I think he actually makes a fair criticism, however I don’t know if there are only eight genuine strategic bond funds – there are a few more than that," he said.
"However, we think there are quite a few funds in the sector that have a heavy bias towards high yield."
"A lot of those funds are more or less high yield funds, which means they carry with them more or less the same risk as in high yield."
"I think one of the biggest mistakes strategic bond managers have made is with developed market government bonds."
"Certainly some managers sold out of government bonds when yields dropped to around 3 per cent because they felt they couldn’t go any lower."
"But I don’t think they appreciated how difficult an environment we were in. When yields dropped to around 2 per cent and prices went up, they did miss rising gains – but I’m not saying all of them because some did get it right."
"But considering how flexible strategic bond mandates are, I think some missed out."
"I don’t think some are flexible enough and don’t use their overseas mandates as much as they could. We also haven’t seen enough funds use derivatives or short positions as much as we would like," he added.
AWD Chase de Vere’s Patrick Connolly disagrees with Hodges that there is a problem, saying that what matters is that an investor is clear about the strategy of the fund and that it suits their aims.
"I can see what he is saying, but I don’t necessarily agree," he said.
"An example of that is one we like: the Fidelity Strategic Bond fund. It normally has around 50 per cent in higher investment grade corporate bonds or sovereign debt and it won’t usually move away from that."
"The important factor is that investors and advisers know what they are getting from their strategic bond fund."
"Just because a fund has more flexibility, it doesn’t mean it will outperform. Also, the greater flexibility can sometimes mean investors are getting less insight."
L&G Dynamic Bond has an ongoing charges fee (OCF) of 1.42 per cent and requires a minimum investment of £500.