Traditionally, bonds have offered investors useful diversification from equity markets. However, in recent years their yields have grown unattractive, particularly as widespread bond buying programmes (quantitative easing) by central banks have pushed up prices. Strategic bond funds, such as MI TwentyFour AM Dynamic Bond Fund (GB00B57TXN82), are better placed to hunt out opportunities as they can invest flexibly across a range of fixed income assets.
- Invests across fixed-income spectrum
- Good performance
- Experienced managers
- Attractive yield
- Yield can vary
This fund aims to provide an attractive level of income along with the opportunity for capital growth by investing in a broad range of fixed income assets, including investment grade, high yield and government bonds, and asset-backed securities (ABS).
That nimble approach should prove beneficial as central banks embark on a period of interest rate tightening, which could hurt bond prices. Adrian Lowcock, investment director at Architas, says: "A fully flexible bond fund can shop anywhere in the market. So if the bull market in the bond market is over, you want a fund that is flexible to find opportunities as it won’t be as easy to make money [from bonds]."
The fund also hedges positions and uses derivatives, including credit and interest rate derivatives, to increase or decrease its exposures, which means it is able to perform strongly throughout the credit cycle and in both rising and falling interest rate environments.
Its relatively short duration also means it should offer some protection to investors in a rising rate environment. More than half of the bonds in the fund are due to mature within one to five years and less than 3 per cent of the bonds are maturing in 10 years or more.
The fund has also performed strongly, having beaten its benchmark, the Investment Association Sterling Strategic Bond sector average, and broad bond indices including the Bloomberg Barclays Global Aggregate Hedged GBP index over one, three and five years. It has an attractive yield of about 4.7 per cent.
TwentyFour Asset Management is a boutique bond house with specialist expertise and the Dynamic Bond Fund is managed by two of its partners, Gary Kirk and Eoin Walsh, who have 50 years of experience between them. The specialist nature of the house means that, unlike other bond funds, the Dynamic Bond fund is invested in a range of more esoteric areas of the bond market with appealing risk/reward characteristics that other managers choose to ignore.
This includes a consistent weighting to ABS – bonds backed by financial assets such as mortgages – that offer higher yields than other fixed income assets with low interest rate risk. ABS were shunned following the financial crisis but the team invests mainly in high-quality European securities. ABS currently make up 16.20 per cent of the portfolio, the second-largest asset class after banks at 24.68 per cent.
The UK represents 35.4 per cent of the portfolio, followed by Europe at 33.3 per cent. Recently the managers have been adding to Australian government bonds, which have reasonable yields and where interest rates are likely to remain low.
The key risk with this dynamic approach lies in the chance that its yield could vary if it moves out of certain areas because it sees other opportunities elsewhere.
"As the fund’s primary objective is total return the managers are not going to target sustaining a particular yield,” says Mr Lowcock. “So income seekers might want to hold this fund in addition to another fixed income fund for a bit more certainty over the long term."
But providing you are comfortable with the higher risk, MI TwentyFour AM Dynamic Bond Fund’s strong performance record, flexible mandate and experienced management team make it an attractive option. Buy. EA
MI TwentyFour Dynamic Bond Fund (GB00B57TXN82) | |||
PRICE: | £113.49 | MEAN RETURN: | 4.84% |
IA SECTOR: | Sterling Strategic Bond | SHARPE RATIO: | 0.99 |
FUND TYPE: | Oeic | STANDARD DEVIATION: | 4.36% |
FUND SIZE: | £1.54bn | ONGOING CHARGE: | 0.77% |
No OF HOLDINGS: | 143* | YIELD:: | 4.73% |
SET-UP DATE: | 26/04/2010 | MORE DETAILS: | twentyfouram.com |
MANAGER START DATE: | Gary Kirk and Eoin Walsh: 26/04/2010 |
Source: | Morningstar, as at 14/08/17 & *Morningstar, as at 30/06/17 |
Performance |
Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) |
MI TwentyFour AM Dynamic Bond | 9.0 | 19.2 | 51.6 |
IA £ Strategic Bond sector average | 3.7 | 15.3 | 31.0 |
ICE LIBOR 3 Month GBP | 0.4 | 1.6 | 2.7 |
Bloomberg Barclays Global Aggregate Total Return index Hedged to GBP | -1.3 | 9.9 | 17.2 |
Source: | Morningstar, as at 10/08/17 |
Top ten holdings, as at 30/06/17 (%) |
US Treasury Note 1.125% | 3.77 |
Portugal (Rep Of) 4.125% | 2.93 |
Coventry Building Society | 2.12 |
Australia (Cmnwlth) 5.75% | 1.98 |
Garfunkelux Holdco 3 8.5% | 1.97 |
Nationwide Bulding Society Cv | 1.86 |
US Treasury Note 0.625% | 1.79 |
Cabot Finl (L 7.5% | 1.74 |
Barclays Cv | 1.48 |
Pension Ins 6.5% | 1.46 |
Source: | Morningstar |
Sector breakdown as at 31/07/17 (%) |
Banks | 24.68 |
Asset-backed securities | 16.20 |
Government | 13.52 |
Insurance | 12.95 |
European high yield | 12.40 |
US high yield | 9.90 |
Emerging markets | 7.82 |
IG corporates | 0.39 |
Cash & equivalent | 2.13 |
Source: | TwentyFour Asset Management |