The key to a healthy portfolio is diversification, and for many investors this means including some investments that are lower risk or have a different return profile to equities. Fixed-interest securities – bonds – are usually considered to be lower risk than equities because they pay a regular, fixed rate of interest income over the life of the instrument. And when bonds mature their issuers are supposed to return the face value of the security to the lender.
Good total returns
Regular income
Diversification
Credit risk
Investors can get exposure to a range of fixed-interest securities such as government and corporate bonds, and higher-risk high-yield bonds, through strategic bond funds. Options include Baillie Gifford Strategic Bond (GB0005947741), which aims to pay a monthly income and, when market conditions allow, capital growth. It has has been co-managed by Torcail Stewart since 2010 and Lesley Dunn since 2018, who aim to invest in a diverse range of fixed-interest securities, although at the moment mainly hold corporate bonds.
The fund invests in securities denominated in sterling and other currencies, but in the case of the latter hedges them back to sterling. Mr Stewart and Ms Dunn focus on the qualities of individual companies, rather than prevailing macroeconomic events. They invest in investment-grade corporate bonds that have a relatively low risk of default and high-yield bonds, which are issued by companies that are typically deemed higher risk but deliver higher yields in return.
The fund typically invests in 60 to 80 companies, and its largest holdings are bonds issued by Netflix and Co-operative Group. Its largest sector exposure is insurance, which accounts for 13 per cent of its assets, followed by utilities at 11.2 per cent. It has a historic yield of 3.4 per cent, which is lower than those of some of its sector peers, because the fund’s managers look for a good risk-adjusted income rather than just high yields. The fund has made good total returns, particularly over five and 10 years, which is important as it is a long-term investment option.
Over 10 years, the fund returned 152.52 per cent, beating the Investment Association (IA) Sterling Strategic Bond sector average of 48.41 per cent. It was also ahead of Bloomberg Barclays Global Aggregate Hedge, a broad bond index, which made a return of 83.75 per cent. Over five years, the fund returned 29.93 per cent, in contrast to the IA Sterling Strategic Bond sector average of 16.82 per cent and Bloomberg Barclays Global Aggregate Hedge index's return of 19.01 per cent. The fund’s managers measure its performance against a hybrid index that comprises 70 per cent ICE Bank of America Merill Lynch Sterling Non Gilts Index and 30 per cent ICE Bank of America Merill Lynch European Currency High Yield Constrained Index, hedged into sterling, and at the end of May the fund was ahead of this index over one and three years.
As the fund is invested in bonds it is exposed to credit risk and changes in interest rates. If interest rates increase, the face value of bonds could fall, meaning investors in them, such as this fund, receive less when they mature. Baillie Gifford Strategic Bond invests in high-yield bonds, which are more likely to default. If this happened it would be detrimental to the fund's returns and could mean the fund's holders experience a fall in their monthly income. The fund had about 32 per cent of its assets in high-yield bonds at the end of March, but because it is a strategic bond fund with a flexible mandate its allocation to this area could increase, making the fund higher risk.
However, the fund’s managers work to mitigate the risks of individual bond issuers by picking resilient businesses with attractive yields.They also protect against interest rate fluctuations by diversifying their exposure across the world and a broad range of sectors. The managers also look at how different industry sectors relate to one another and change positions when necessary to avoid concentration risk.
So if you have a long-term investment horizon, the time to carefully monitor this fund's credit quality exposure and want a steady monthly income, Baillie Gifford Strategic Bond Fund still looks like a good option. Buy. ZB
Baillie Gifford Strategic Bond Fund (GB0005947741)
| PRICE | 90.22p | MEAN RETURN | 6.45% |
| IA SECTOR | Sterling Strategic Bond | SHARPE RATIO | 1.38 |
| FUND TYPE | Open-ended investment company | STANDARD DEVIATION | 4.20% |
| FUND SIZE | £1.02bn | ONGOING CHARGE | 0.52% |
| No OF HOLDINGS | 117 | YIELD | 3.43% |
| SET UP DATE | 26/02/1999* | MORE DETAILS | www.bailliegifford.com |
| MANAGER START DATE | Torcail Stewart 2010, Lesley Dunn 2018** |
Source: Morningstar, as at 26 June 2019 *Bailie Gifford **Fund Calibre, as at 26 June 2019
Performance
| Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | 10-year cumulative total return (%) |
| Baillie Gifford Strategic Bond Fund | 6.69 | 24.25 | 29.93 | 152.52 |
| Bloomberg Barclays Global Aggregate Hedge | 6.11 | 5.63 | 16.82 | 48.41 |
| IA Sterling Strategic Bond sector average | 5.16 | 13.6 | 19.01 | 83.75 |
Source: FE Analytics, as at 26 June 2019
Top 10 physical bond holdings (%)
| Netflix 4.625% 2029 | 2.2 |
| Co-operative 7.5% 2026 | 2.2 |
| National Grid 5.625% 2025/73 | 2.1 |
| IBRD 5.75% 2032 | 2.00 |
| Fidelity 2.5% 2026 | 2.00 |
| Brown-Forman 2.6% 2028 | 2.00 |
| Bank of America 7% 2028 | 1.8 |
| IBRD 1.375% 2020 | 1.8 |
| Darling Ingredients 3.625% 2026 | 1.8 |
| DS Smith 2.875% 2029 | 1.8 |
Source: Baillie Gifford, as at 31 May 2019
Sector breakdown (%)
| Insurance | 13 |
| Utility | 11.2 |
| Telecommunications | 8.00 |
| Media | 7.10 |
| Retail | 6.20 |
| Commercial Mortgage Backed | 5.90 |
| Banking | 5.90 |
| Supranational | 5.50 |
| Technology and Electronics | 5.00 |
| Leisure | 4.40 |
| Real estate | 3.40 |
| Capital goods | 3.40 |
| Financial services | 3.20 |
| Health care | 3.20 |
| Services | 3.10 |
| Other | 8.7 |
| Cash and derivatives | 2.6 |
Source: Baillie Gifford, as at 31 May 2019
