Professional investors have been paying more attention to strategic bond funds in light of tighter monetary policy, with offerings from GAM, Pimco and Artemis being among the most popular with those researching on FE Analytics.
Last week, the Bank of England lifted interest rates for the first time in a decade by shifting the base rate from 0.25 per cent to 0.5 per cent. Bank governor Mark Carney said the move, which essentially reverses the 25-basis point cut made after the Brexit referendum, comes on the back of stable economic growth and above-target inflation.
Of course, the BoE isn’t the only central bank to change policy in recent months. The Federal Reserve has moved its own base rate up from historic lows and unveiled plans to unwind the $4.5trn portfolio of bonds accumulated under its quantitative easing (QE) programme.
Meanwhile, the European Central Bank recently announced plans to scale back its own massive economic stimulus programme, saying that it will buy €30bn of assets each month from January down from its current pace of €60bn.
Given this backdrop, investors have been considering the impact on their bond allocations. With this in mind, we used the FE Analytics Market Intel tool to discover what the financial advisers, wealth managers and other investment professionals have been researching in the most flexible of the Investment Association’s bond fund sectors.
Research on IA Sterling Strategic Bond fund over 12 months
Source: FE Analytics Market Intel tool
The IA Sterling Strategic Bond sector is the 11th most researched peer group by the professional investors on FE Analytics over the past 12 months, but has seen an uptick in popularity over the past month as investors mull the impact of tighter monetary policy on fixed income markets.
Indeed, the amount of research being carried out into the sector’s members in October was 20 per cent up on the 12-month average. The peer group was already the most popular of all the Investment Association bond sectors with the professional investors on FE Analytics.
Over the past year, the five most heavily researched strategic bond funds have been Jupiter Strategic Bond, M&G Optimal Income, Invesco Perpetual Monthly Income Plus, Henderson Strategic Bond and Fidelity Strategic Bond.
However, we wanted to see which strategic bond funds the professionals have been paying more attention to during the past month, when there was more research being carried out on the sector.
In order to do this, we looked at each fund’s share of the total research carried out on the sector during October 2017 and over the past year, then determined which ones have seen the largest uptick in professional fund picker interest. The results are shown in the following table.
Source: FE Analytics Market Intel tool
It’s important to note that Jupiter Strategic Bond was still the most researched member of the sector in October (although its share of research fell from 6.74 per cent over the year to 6.39 per cent in October). Funds such as Invesco Perpetual Monthly Income Plus, M&G Optimal Income and Fidelity Strategic Bond remained popular in the month.
However, the product seeing the greatest uptick in attention was FE Alpha Manager Anthony Smouha and Gregoire Mivelaz’s £913.7m GAM Star Credit Opportunities GBP fund; it’s also moved from being the 11th most researched fund to the eighth. This has been a consistently strong performer and is the sector’s best performing fund over three and five years and is its top decile over shorter time frames.
The five FE Crown-rated fund has a specialist approach that focuses on the junior and subordinated debt of investment grade companies. The belief behind the approach is that there is a very low likelihood that quality financial companies will default on their debt, therefore the portfolio can pick up extra carry by holding lower tier debt issued by these businesses.
In a recent update, Smouha and Mivelaz suggested that the portfolio could hold up if bond yields do start to tick up, as they would be in a rising interest rate environment. “We continue to monitor the possibility of rising generic yields. However, we also expect that the income offered by our portfolio with its blend of fixed-rate, fixed-to-floating bonds and discounted floating-rate notes will provide an attractive return as well as the potential for capital gains,” the managers said.
Pimco GIS Income has jumped from being the 26th most researched IA Sterling Strategic Bond fund over the past year to the 15th most researched in October. The fund, which has assets of close to £45bn, is managed by Pimco group chief investment officer Daniel J. Ivascyn and Alfred T. Murata.
The fund takes a broad-based approach to investing in bonds, offering exposure to multiple areas of the global bond market with the aim of providing its investors with consistent income over the long term. The portfolio is split into two sections: higher yielding assets that are expected to benefit when economic growth is robust and higher quality assets that are likely to benefit if economic growth is weak.
“With the potential for interest rates to recalibrate higher, we are focused on tactically adjusting interest exposure globally to the most attractive countries, currently the US and Australia,” Ivascyn and Murata said in their latest update. “We are also allocating to securities with floating interest rates in an effort to reduce sensitivity to interest rate volatility and seek to protect principal.”
Performance of funds vs sector over 3yrs
Source: FE Analytics Market Intel tool
EdenTree Amity Sterling Bond was the fund seeing the third biggest jump in professional investor interest during October, but to a lesser extent than the two already mentioned. The £144.9m fund, which is managed by Chris Hiorns and David Katimbo Mugwanya, is built around a highly diversified portfolio of government bonds and good quality, fixed interest securities.
Their approach has an ethical element, in that it only invests in companies that make a positive contribution to society and the environment through sustainable and socially responsible practices while avoiding those involved in activities such as alcohol, gambling, the publication of violent or explicit materials, tobacco, and weapon production.
Hiorns and Mugwanya have maintained a short duration bias in their portfolio, seeking out quality corporate debt at attractive yields, which would make the fund less sensitive to moves in interest rates.