Stock markets have remained rangebound for much of the year, and with the outlook remaining fairly unclear, it's no surprise that investors have piled money into bond funds. But not all fixed-income funds are created equal - and many advisers argue that the greater flexibility afforded by strategic bond funds, like this one, makes them a better choice than plain-vanilla corporate bond funds.
- Good performance
- Attractive yield
- Diversified portfolio
- Experienced managers
- Slightly higher TER
"Strategic bond funds can invest across the whole fixed income universe. That includes high yield bonds which have less of a correlation with gilts (UK government bonds)," says Rob Pemberton, investment director at HFM Columbus. "We continue to recommend them."
Their ability to move into higher return, but higher risk assets means they are not suitable for very cautious or short-term investors. But if you don't have these investment constraints we have some strategic bond funds such as L&G Dynamic Bond Trust and Henderson Strategic Bond in our IC Top 100 Funds list (see the full list here). Another strong contender in the space is Jupiter Strategic Bond.
This fund is only four years old but has built up a good track record, gaining it a place on the recommended lists of brokers such as Hargreaves Lansdown and Chelsea Financial Services. It is among the top ten performers in its sector over three years and has an attractive yield of nearly 5 per cent.
| IC TIP RATING | |
|---|---|
| Tip style: | INCOME |
| Risk rating: | MEDIUM |
| Timescale: | MEDIUM |
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's manager, Ariel Bezalel, seeks investments offering value and good risk/reward positions, considering both the bond issuer's credentials and macro economic considerations. He is assisted in his research by Rhys Petheram, co-manager of Jupiter Distribution Fund and a former specialist at credit ratings agency Moody's. Mr Bezalel takes a macroeconomic view of matters such as inflation, interest rate outlooks and the shape of the yield curve in relation to the corporate bond market, which influences the portfolio positioning.
He prefers issues from companies with robust business models and competent management teams and invests for the medium to long-term. At present he tries to invest in bonds at the highest possible end of a company's capital structur, so that in the event of a default the fund would be one of the first in line to be paid back. Mr Bezalel also spends a lot of time meeting company managers.
More than a third of the fund's assets are in investment-grade paper (rated triple B or above and considered least likely to default), while the fund also has a 35 per cent exposure to cash. This allocation to safer assets offsets an allocation of around 40 per cent to high yield bonds which are riskier but boost returns.
The fund's total expense ratio (TER) of 1.5 per cent is more expensive that that of a number of bond funds but is only a few more basis points than the TER of strategic bond funds such as L&G Dynamic and Henderson Strategic. With this kind of fund you get a more varied and dynamic portfolio than with a traditional corporate bond fund and it is also better to pay a little more for a fund that delivers than a cheap one that loses you money. On that basis, the Jupiter fund makes a worthy buy.
Read more on spreading your fixed income risk
JUPITER STRATEGIC BOND Inc (GB00B2RBBC80) | |||
| PRICE | 61.79p | MEAN RETURN | 12.48% |
| IMA SECTOR | Sterling Strategic Bond | SHARPE RATIO | 1.93 |
| FUND TYPE | Unit trust | 6 MTH PERFORMANCE | 5.87% |
| FUND SIZE | £1bn | 1 YEAR PERFORMANCE | 10.56% |
| No OF HOLDINGS | 197* | 3 YEAR PERFORMANCE | 41.89% |
| SET UP DATE | 02-Jun-08 | TOTAL EXPENSE RATIO | 1.50% |
| MANAGER START DATE | 02-Jun-08 | YIELD | 4.95% |
| TURNOVER | 125.94%* | MINIMUM INVESTMENT | £500 |
| STANDARD DEVIATION | 6.14% | MORE DETAILS | www.jupiteronline.co.uk |
Source: Morningstar, *Jupiter.
Performance data as at 10 August 2012.
Top ten holdings as at 30 June 2012
| Australia Government 4.75% 21/04/27 | 7.21 |
| Australia Government 5.5% 21/04/23 | 6.65 |
| Australia Government 5.75% 15/07/22 | 4.76 |
| Eksportfinans 5.5% 26/06/17 | 1.73 |
| Golden Close Maritime 11% 09/12/15 | 1.66 |
| Microsoft 0% 15/06/13 | 1.63 |
| Spirit 5.472% 28/12/28 | 1.5 |
| TUI Travel 6% CV 05/10/14 | 1.49 |
| Elli Finance 8.75% 15/06/19 | 1.33 |
| Interxion Holding 9.5% 12/02/17 | 1.22 |
Credit rating breakdown
| AAA | 20.5 |
| AA | 1.63 |
| A | 3.82 |
| BBB | 12.93 |
| BB | 22.02 |
| B | 15.14 |
| CCC | 3.1 |
| Not rated | 14.67 |
