Look beyond L&G Dynamic Bond Trust

IC TIP RATING

Tip style: INCOME

Risk rating: MEDIUM

Timescale: LONG TERM

More recently, stockbroker Killik & Co has downgraded its Neutral rating to a Sell and removed the fund from its coverage. "Income has declined modestly but, more significantly, there has since been a change of fund manager," says Killik. "The new manager has decided to aggressively increase high yield exposure ahead of the recent shake-out. Investment performance has deteriorated in recent months as high yield bonds have fallen sharply in value."

Killik had already downgraded the fund from Buy to Neutral in November 2012 due to concerns about income sustainability and portfolio flexibility, given its huge asset growth.

And the fund is not doing as well as it used to, underperforming its Sterling Strategic Bond sector peers over one and five years, placing it in the third quartile of its sector over one and five years, and second quartile over three.

The fund has beaten its Morningstar benchmark over those periods, and portfolio duration remains very short at 3.4 years. This will help to protect against future interest rate rises, albeit at the expense of income. And in the years ahead the fund's new manager might do well.

But none of this is certain so, as there are many other strategic bond funds to choose from, for the time being it might be better to opt for an alternative. We include three strategic bond funds in our IC Top 100 Funds.

M&G Optimal Income (GB00B1H05049) is run by highly regarded manager Richard Woolnough and invests across a broad range of fixed income, and can include other assets, such as collective investment schemes, money market instruments, cash, near cash, deposits, equities and derivatives. The fund is among the top 25 per cent of funds in its sector in terms of performacne over five years.

Henderson Strategic Bond (GB0007495293) invests in higher yielding assets including high yield bonds, investment grade bonds, government bonds, preference shares and other bonds. It may also invest in equities. It is managed by fixed income veteran John Patullo, who is also Henderson's head of retail fixed income. It is second quartile over one and three years.

Jupiter Strategic Bond (GB00B2RBBC80) aims for a high income with the prospect of capital growth by seeking out the best opportunities within the fixed interest market globally. This is achieved via investment in assets including high yield bonds, investment grade bonds, government bonds, preference shares and convertible bonds. The fund doesn't use derivatives for investment but does use them for efficient management of the portfolio, for example, to hedge exposure to euro-denominated bonds back into sterling. The fund is among the top ten performers in its sector over five years.

Also see this week's big theme for more bond fund suggestions

So with other strategic bond fund options on offer, for the time being it might be better to avoid L&G Dynamic Bond Trust. Sell.

Source: Morningstar, *Legal & General.

Source: Morningstar, as at 27 October 2014

Top 10 holdings as at 31 August 2014

Sector breakdown (does not add up to 100 per cent because the fund uses derivatives)