Bonds no longer seem appealing because years of loose monetary policy mean they are more expensive so do not offer such high yields. And with interest rates rising in the US and possibly the UK, bond prices might fall – especially those of lower-yielding, safer government and higher-quality corporate bonds.
Good performance
High yield
Defensive strategy
Lower volatility
Higher sensitivity to interest rates
Nonetheless, many investors need to diversify their portfolios, in particular those with lower risk tolerances. So one solution is a strategic bond fund which allocates to various types of debt.
Managers of strategic bond funds can also move their allocations to respond to economic and market conditions. However, this means that strategic bond funds' allocations can change rapidly, so even if they seem fairly defensive when you invest, within months they could have a heavy allocation to debt with a similar risk profile to equities, such as high-yield and emerging market bonds.
However, Sanlam Strategic Bond Fund (IE00B7VMRN51) has managed to deliver excellent returns with less volatility. According to research company Morningstar, over three years the fund has captured about 57 per cent of the global bond market's returns but only 5.7 per cent of the losses. By contrast, funds in the Morningstar Sterling Diversified Bond sector have on average captured 74 per cent of the rise and 72 per cent of the losses.
Sanlam Strategic Bond has been run by Craig Veysey since launch in March 2012, over which time it has been one of the best-performing funds in the Investment Association (IA) Sterling Strategic Bond sector. It has returned 22 per cent and 38 per cent over three and five years, compared with the Sterling Strategic Bond sector average return of 9 per cent and 18 per cent, and 24 per cent and 21 per cent for Bloomberg Barclays Global Aggregate index.
Although some Strategic Bond funds have delivered higher returns, they have allocated significant amounts to high-yield bonds, which have been in a bull market in recent years and are significantly more correlated to equity markets.
Mr Veysey, by contrast, holds a core of safer investment-grade corporate bonds alongside global government bonds as a safety net. He also adds some high-yield bonds to boost returns. He picks bonds very carefully, using research and analysis to get a strong understanding of what drives their price. And he tries to to buy and sell them at the right time.
Darius McDermott, managing director at FundCalibre, says: "Craig Veysey is very active, looking for pockets of opportunity and moving quickly to make the most of them. He likes finding undervalued bonds that have the potential to re-rate, and he holds them until they do."
Sanlam Strategic Bond also has an attractive yield of 5.7 per cent.
But there are some risks. Although Mr Veysey actively manages the fund's duration, and keeps it between four and 10 years, other funds have reduced their durations to lower levels. Duration is a measure of a bond or bond fund's sensitivity to rising interest rates, and the longer a bond has until maturity the more its value will fall when rates rise. And as central bank intervention unwinds it's unclear how badly bond markets will be affected.
However, Mr Veysey has 17 years investment experience and has proved he can allocate to the right areas of fixed income at the right times, and deliver lower volatility than his peers. This means the fund is probably a good option in an uncertain time of transition for the bond market.
So if you need diversification and lower volatility, Sanlam Strategic Bond looks a good way to get it without sacrificing returns or yield. Buy. TL
| Sanlam Strategic Bond (IE00B7VMRN51) | |||
| PRICE | 148p | MEAN RETURN | 6.83% |
| IA SECTOR | Sterling Strategic Bond | SHARPE RATIO | 1.51 |
| FUND TYPE | Open-ended Investment Company (Oeic) | STANDARD DEVIATION | 4.17% |
| FUND SIZE | £242m | ONGOING CHARGE | 0.64%* |
| No OF HOLDINGS | 116* | YIELD | 5.74% |
| SET-UP DATE | 02.03.2012 | MORE DETAILS | sanlam.co.uk |
| MANAGER START DATE | 02.03.2012 | ||
Source: Morningstar, *Sanlam as at 30.04.18
Performance
| Fund/benchmark | 1-year total return (%) | 3-year cumulative return (%) | 5-year cumulative return (%) |
| Sanlam Strategic Bond Fund | 5.91 | 21.63 | 37.69 |
| IA Sterling Strategic Bond sector average | 0.53 | 8.94 | 18.01 |
| Bloomberg Barclays Global Aggregate index | -2.17 | 23.97 | 20.75 |
Source: FE Analytics at at 29.05.18
Top 10 holdings as at 30.04.2018 (%)
| Lloyds Bank Plc 13% Step-Up Perp Cap Secs Gbp | 3.99 |
| Italy(Republic Of) 2.7% Bds 01/03/47 Eur1000 | 3.85 |
| HM Treasury United Kingdom Dmo 1.25% Idx-Lkd Gilt 22/11/27 Gbp0.01 | 3.44 |
| Cheltenham & Gloucester 11.75% Perp Subord Bds Gbp50000(Regd) | 3.40 |
| Buoni Poliennali Del Tes 2.05% Bds 01/08/27 Eur1000 | 3.21 |
| Old Mutual Plc 8% Subord Nts 03/06/21 Gbp100000 | 3.00 |
| Tesco Property Finance 3 Plc 5.744% Bds 13/04/40 Gbp1000 | 2.8 |
| United States Of Amer Treas Bills 2.25% Tb 15/08/27 Usd100 | 2.74 |
| United States Of Amer Treas Notes 0% Nts 15/02/25 Usd1000 | 2.74 |
| Standard Life Aberdeen Plc 6.75% Perp Reset Sub Gtd Bds Gbp(Var) | 2.64 |
Source: Sanlam
| Sector breakdown (%) | |
| Insurance | 30.4 |
| Banks | 19.9 |
| Government | 18.9 |
| Savings & loans | 7.1 |
| Diversified financials | 5.8 |
| Real estate | 5.0 |
| Energy | 4.7 |
| Food | 2.6 |
| Others | 5.6 |
Source: Sanlam as at 30.04.2018
