Strategic bond funds should be more capable of generating yield in a market full of expensive bonds and of avoiding overvalued areas.
The three AFI indices tell us which funds advisers are specifically recommending for their clients, being made up of the preferred funds of a panel of the country’s leading IFAs.
There are three indices, designed for investors with different attitudes to risk: aggressive, balanced and cautious. Here we look at some of the bond funds the experts favour for each type.
Aggressive: Jupiter Strategic Bond
There are only three strategic bond portfolios in the AFI Aggressive index, one of which is FE Alpha Manager Ariel Bezalel’s Jupiter Strategic Bond.
Bezalel’s £1.8bn, five crown-rated portfolio is yielding 4.9 per cent, putting it in the second quartile of the sector.
It leads the sector in terms of total returns over five years, having made 101.02 per cent against the 49.64 per cent of its iBoxx Sterling Non-Gilts All Maturities benchmark.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The manager has recently opened up positions in Greek and Cypriot government bonds to maintain the yield on his portfolio, while he has also bought bonds financing oil rigs.
The fund has also had significant short positions in government bonds since the beginning of 2012, and has been increasing its weighting to high yield in recent months.
Bezalel (pictured) recently outlined how he was positioning the fund and the rationale behind his decision to use derivatives to limit risk.
The fund is available with a minimum initial investment of £500 and has ongoing charges of 1.49 per cent.
The other two funds included on the aggressive index are Fidelity Strategic Bond and M&G Optimal Income.
Balanced: L&G Dynamic Bond
For the investor with an intermediate appetite for risk, the AFI panel recommends L&G Dynamic Bond.
The £1.9bn portfolio, managed by Richard Hodges, is yielding 5 per cent at present, putting it in the second quartile in the sector.
Hodges’ fund did exceptionally well in 2008 and 2009, which has pushed up its long-term numbers, although with 2008 disappearing off the five-year performance figures, the fund has dropped into the second quartile over that time.
The fund has made 77.09 per cent over this period while the average portfolio in the sector is up just 56.99 per cent.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The fund is 51.49 per cent invested in high yield, with a further 30.96 per cent in investment grade, the majority in financials.
A total of 42.18 per cent of the fund is invested in financials, with the second-biggest sector bet being the 9.11 per cent in industrials.
The fund also has 10.22 per cent in government bonds, including index-linkers. It is available with a minimum initial investment of £500 and has ongoing charges of 1.42 per cent.
The full list of funds included in the balanced index can be found here.
Cautious: M&G Inflation Linked Corporate Bond
For cautious investors, the AFI panel likes the £814m M&G Inflation Linked Corporate Bond fund, managed by Jim Leaviss and Ben Lord.
The fund invests in index-linked bonds issued by both governments and corporates, with 17.7 per cent exposure to sovereigns and 75.1 per cent to investment grade.
Performance is much slower and less volatile than most funds in the sector: the portfolio has one of the lowest volatility scores over three years but has made fourth-quartile returns of just 12.74 per cent over this time.
Performance of fund vs sector over 5yrs
Source: FE Analytics
It is available with a minimum initial investment of £500 and has ongoing charges of 1.16 per cent.
The full range of funds selected for cautious investors can be found here.
Click here to learn more about bonds, with the FE Trustnet guide to fixed interest.