Protect your income with Artemis Strategic Bond

The US Federal Reserve has already started raising interest rates and has indicated that further rate rises are likely. And this month the Fed begins unwinding its bond-buying (quantitative easing) programme, reducing the amount of bonds it buys by $10bn each month, rising to $50bn a month, or $600bn a year, by October 2018. Closer to home, the Bank of England has also hinted at a rise in interest rates, as soon as this year.

The loss of central bank stimulus means bond prices could fall as yields rise. But holding a strategic bond fund could be a way of ensuring you still get good returns from your bond exposure. These funds are able to invest across the fixed-income spectrum, focusing on the areas of the bond universe that look best and avoiding less desirable ones. One example of a fund in this area is Artemis Strategic Bond Fund (GB00B2PLJS27).

The fund has been a consistently strong performer and is among the top quartile of funds in the Investment Association (IA) Sterling Strategic Bond sector over one, three and five years. It currently offers an attractive yield of 4.04 per cent. And investors are able to choose to receive income payments from the fund on a quarterly or monthly basis. It also has a low ongoing charge of 0.58 per cent.

The fund aims to achieve a combination of income and capital growth, preserving capital in difficult times and profiting when conditions improve, by owning bonds that perform in each stage of the economic cycle. It can invest across the credit spectrum, moving between areas such as gilts (UK government bonds), investment-grade and high-yield bonds. The fund spreads risk by typically holding between 100 and 130 positions and is well diversified by region, sector, credit type and maturity. It can also use derivatives, such as credit default swaps or futures, to help manage risk.

The fund also benefits from an experienced management team in the form of James Foster and Alex Ralph, who have been running the fund since its launch in 2005. Mr Foster has more than 20 years' experience of managing bond funds and was one of the first to establish a retail bond fund in the UK.

The managers assess macroeconomic issues such as interest rates, inflation and credit quality to determine the fund's positioning among investment-grade, high-yield bonds and gilts. They think the best opportunities often lie in high-yield and the fund has a strong bias here; currently about 50 per cent of the portfolio is in bonds rated BB or below. The managers are also shorting government bond futures such as German government bonds and US Treasuries in response to the willingness of central banks to raise interest rates. This represents 8 per cent of the portfolio.

Adrian Lowcock, investment director at Architas, says the ability to use derivatives can help the fund benefit from market inefficiencies. And the managers have a strong track record on macro calls.

"If it is the end of the bull market in bonds, you want managers with a certain amount of experience,” he adds. “Up until now it’s been very easy for a manager to make money out of bonds because central banks have been a strong tailwind. But it’s going to get harder and in those situations, you want a manager who is very knowledgeable and experienced."

But there are risks with shorting – if the managers make the wrong call it can cost the fund money. And the fund’s exposure to high-yield bonds can increase volatility. But the fund’s strong track record and managers’ experience suggest they generally make the right calls.

So if you want an attractive income, the potential for stable long-term returns and capital preservation in difficult times, Artemis Strategic Bond is a strong contender. Buy. EA

Artemis Strategic Bond Fund (GB00B2PLJS27)

Source: Morningstar as at 02/10/2017, *Artemis as at 30/06/2017

Performance

Source: Morningstar as at 02/10/2017

Top 10 holdings as at 31/08/17 (%)

Source: Artemis

Sector breakdown as at 31/08/17 (%)

Source: Artemis