Look to limit downside via Jupiter Strategic Bond

In view of the current investment climate it probably makes sense to get your core exposure to bonds via a fund whose manager has been lowering risk, such as Jupiter Strategic Bond (GB00B544HM32). Its manager, Ariel Bezalel, can change the fund’s allocation and risk profile as he sees appropriate, because it can allocate across various parts of the debt market. This means it can take advantage of various opportunities and, perhaps even more importantly, allocate away from what look like risky areas. So, for example, if interest rates rise, which can be a problem for bonds, a strategic bond fund could reduce exposure to the ones that would be worst affected, and invest in ones that are less affected or could even benefit.

“Jupiter Strategic Bond fund has the flexibility to invest in fixed-income markets across the world,” say analysts at research company FundCalibre. “Ariel Bezalel has demonstrated an aptitude for reading the economic cycle. This, combined with solid security selection, has seen the fund perform well. Ariel also has a strong focus on downside risk – preserving capital to the best of his ability – which should provide investors with some comfort.”

For example, the fund’s investment team had reduced exposure to emerging markets at the beginning of 2018, so during emerging market turbulence in August it was one of the better performers in the Investment Association (IA) Sterling Strategic Bond fund sector. The fund’s allocation to high-quality triple-A-rated assets, such as US Treasury and Australian government bonds, also helped during that month.

The fund has one of the better volatility scores among its peers over one and three years, according to data provider FE Trustnet, and has made positive returns in each of the past six calendar years. The fund also has an attractive 12-month yield of 4.2 per cent.

When selecting bonds to invest in, Mr Bezalel and his team form a view on the global economy to determine how much risk it is appropriate to take, and select countries and sectors they think are likely to offer attractive opportunities. They also conduct thorough analysis on every company and government bond they invest in, as they are looking for ones that are committed to paying down their debts and have the financial strength to meet all their obligations to bondholders, for example by paying regular interest and fully repaying the capital when the bonds mature.

Although Jupiter Strategic Bond's asset allocation is relatively cautious at the moment, it still has exposure to some higher-risk areas of the bond market, such as non-investment-grade bonds and unrated bonds in which it had over 8 per cent of its assets at the end of September. The fund can also use derivatives, for example, to ‘short’ – take bets on the price of a security falling. But if the fund's managers make the wrong call on what to short, it could result in losses.

However, the fund’s investment team has a rigorous process and only holds companies after careful consideration, including the ones with lower credit ratings. And around half of the fund’s high-yield exposure is at the upper end of this category in BB-rated debt, only one grade below investment-grade, which is considered less likely to default.

Using derivatives can also help a fund’s returns if the manager gets the call right, and Mr Bezalel and his team have a good record of doing this. In August, for example, the fund was short emerging market credit default swaps.

So if your portfolio needs exposure to bonds, Jupiter Strategic Bond fund looks like a good way to get exposure to them via a fund and manager well placed to deal with possible challenges such as rising interest rates and the withdrawal of quantitative easing. Buy. LW

Jupiter Strategic Bond (GB00B544HM32)

Source: Morningstar as at 29 October 2018, *Jupiter

Performance

Source: FE Analytics as at 26 October 2018

Top 10 holdings as at 30 September 2018 (%)

Source: Jupiter

Credit rating breakdown as at 30 September 2018 (%)

Source: Jupiter