Allianz Strategic Bond, PIMCO Mortgage Opportunities and Janus Henderson Strategic Bond are among the bond funds that investors should look to in times of market stress, according to a collection of fund pickers.
The recent dramatic swings in global bond markets have left investors looking for some stability in their fixed income allocations.
As such, flexible strategies might be preferred given the range of options at their disposal in navigating the fixed income market.
Below, are the three funds that experts think could give investors a source of return in a tough climate.
Allianz Strategic Bond
Ryan Hughes, head of AJ Bell’s active portfolios, recommended the £3bn Allianz Strategic Bond fund.
Managed by Mike Riddell and Kacper Brzezniak, the fund aims to deliver low correlation to equities by investing globally across credit, interest rates, inflation and currency.
According to FE Investments, the Allianz team holds a philosophy that fixed income markets are by nature inefficient and regularly exhibit structural opportunities to be exploited.
Hughes said: “Over the last 20 years, a lot of bond funds have claimed to be nimble and flexible, but the reality is that when assessing the actual underlying investments, very little actually changes in the portfolios.
“This is not a fund that has followed that approach, making full use of the variety of tools and levers within its remit to navigate the challenging bond environment.”
Hughes outlined that by focusing on the government bond part of the market, Allianz Strategic Bond is able to be flexible despite its size.
“This is something that many of its peers that have large exposure to high-yield bonds wouldn’t be able to achieve,” he added.
Citing the experience of the managers, he concluded that how they position the fund in the near future will determine how well it can navigate any potential market turmoil.
“They have a clear focus on one part of the market and are prepared to adjust the portfolio for what they see happening in front of them,” Hughes said. “As a result, they would have as good a chance as anyone.”
Charlie Parker, managing director of Albemarle Street Partners also opted for the Allianz Strategic Bond fund, and echoed Hughes’ praise of the management team.
“The fund is able to take advantage of changes in volatility to extract alpha and is differentiated from its peer group and more traditional corporate credit exposure,” he said.
Interestingly, the fund has the ability to go 100 per cent in sovereign debt, instead of allocating the portfolio based on credit- and- interest rate risk.
He agrees that the flexibility of the fund is to its advantage, being able to remain liquid and nimble in different economic conditions.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Since March 2018, the five FE fundinfo Crown-rated fund has made a total return of 45.52 per cent, compared to 13.13 per cent for the IA Sterling Strategic Bond sector peer.
Allianz Strategic Bond has an ongoing charges figure (OCF) of 0.63 per cent and a yield of 1.47 per cent.
Janus Henderson Strategic Bond
Parker’s second pick is the £3.1bn Janus Henderson Strategic Bond fund, managed by John Pattullo and Jenna Barnard.
Another fund with an FE fundinfo Crown Rating of five, this flexible strategy can invest in many types of conventional bond, including high-yield, investment grade and government bonds as well as secured loans and derivatives.
“Strategically allocating across asset classes is the fund’s primary source of returns,” said Parker. “The unique derivatives overlay has been instrumental in creating the manger’s long-term track record.”
He explained that because fixed income asset classes are defined by varying degrees of duration and default risk, they offer differing rates of return in different economic conditions.
“The managers can use this diversity to steer the portfolios’ exposure towards asset classes that are expected to generate the highest income with minimal capital volatility in a given economic environment,” he added. “Therefore allowing it to be nimble and adaptable.”
Parker noted that the fund is “unconstrained” and takes strategic asset allocation decisions based on fundamentals, valuation and market momentum.
“This is done while taking the appropriate time horizon into consideration in order to identify the asset classes that generated maximum total return,” he finished.
Performance of fund vs sector over 3yrs
Source: FE Analytics
Over the past three years, Janus Henderson Strategic Bond fund posted a total return of 17.87 per cent against the 13.13 per cent for the average IA Sterling Strategic Bond fund.
It has an OCF of 0.69 per cent and a yield of 2.80 per cent.
PIMCO Mortgage Opportunities
“Those looking for diversification as well as the reassurance of exposure to quality and liquid securities could find the answer in the PIMCO Mortgage Opportunities fund,” said Eduardo Sánchez, senior investment research analyst at Square Mile Investment Consulting & Research.
The fund combines government-guaranteed agency bonds with non-government backed credit market instruments, “with the two elements offering complementary characteristics”.
“The agency securities provide exposure to interest rate risk and low correlation to credit assets given their government-guaranteed status,” Sánchez added.
“Whilst the fund’s exposure to non-agency mortgages and other credit assets such as commercial mortgage-backed securities introduces credit risk to the portfolio, this in turn provides an additional yield pick-up.”
The absolute-return oriented strategy is designed to give investors a rate of return in differing market environments. This has been the case since the start of the year and, despite the spike in global yields, the fund has delivered positive returns due to its low interest rate sensitivity.
Performance of fund vs sector since inception
Source: FE Analytics
Since its inception in 2017, PIMCO Mortgage Opportunities has made a total return of 5.29 per cent, while the average fund in the FO Fixed Int – Global sector made 8.87 per cent.
“We believe the global reach of this income-generating strategy, with a particular focus on the US mortgage market, can offer an additional source of diversification to investor portfolios,” Sánchez said.
“The fund’s limited correlation to equities and credit, in addition to the managers’ focus on both the quality and liquidity of the bonds held also increase the fund’s overall appeal.”
The $2.3bn fund has an OCF of 0.69 per cent and a yield of 4.46 per cent.