Defend your portfolio with JPMorgan Strategic Bond

Strategic bond funds, on average, returned 13 per cent in 2012 (with nearly half making in excess of 15 per cent). But now people might start losing money in fixed income, according to Rob Pemberton, investment director at wealth manager HFM Columbus.

This means he is looking for more absolute-return-style bond funds and his favourite in this category is JPMorgan Strategic Bond (GB00B3RJ9K34). "Its returns look poor if you compare them with strategic bond funds, but you are not really comparing like with like," he says. "Most strategic bond funds are high risk/reward by fixed-income fund standards, with typically a large exposure to high-yield bonds. This is fine in a perky bull market like last year, but potentially exposes the investor to significant loss of capital if corporate or high-yield bonds fall. This year I am far less bullish about corporate and high-yield bonds, expecting only single-digit returns and the potential for some loss of capital.

"This fund is really a cash plus fund and so is managed with a much lower risk/return profile than the typical strategic bond fund - it could just as easily be classified as an absolute-return fund."

Rather than seeking to beat an index or race ahead of its peers, the fund is benchmarked against cash - BBA Overnight GBP Libor (although is managed without reference to its benchmark), and has succeeded in beating this over the past year.

"It's very important when buying a fund to fully understand what it is trying to achieve and its likely pattern of returns," adds Mr Pemberton. "I try not to get too blindsided by relative performance numbers."

JPMorgan Strategic Bond's performance versus its sector peers has not been impressive over one and three years, but it is not looking to beat these and this call is about looking ahead rather than past performance. Since its relatively recent launch in 2009 the fund has delivered steady positive returns on an annual basis, and if it can continue to do this it could limit downside at difficult moments.

More than half of its assets are in investment-grade bonds (rated between AAA and BBB), which are considered less likely to default than lower-graded ones. Better-quality bonds offer lower coupons (interest payments), which means JPMorgan Strategic Corporate Bond Fund does not have the highest yield in its sector, but this is still attractive at 3.3 per cent. The fund's managers also say that, over this quarter, high yield, local emerging market bonds and the associated foreign exchange, together with non-agency mortgages are among their top picks, but in the context of a wide range of fixed income. Corporate high-yield bonds currently account for a third of the portfolio.

The fund also has a reasonable total expense ratio of 1.18 per cent. Mr Pemberton says: "I tell my clients to think about equities as their attack and fixed income as their defence. This fund is about tightening your defence."

So, although JPMorgan Strategic Bond may not be streaking ahead of its peers, with steady positive returns and an absolute rather than relative target in mind, it could be a good shelter if bond markets hit a turbulent patch. Buy.

Source: Morningstar, *JPMorgan.

Morningstar as at 5 February 2013

Top ten holdings as at 31 December 2012

Credit rating breakdown