Higher-quality bonds can mitigate downside during equity market volatility, but currently seem expensive and yield relatively little. If you have a higher risk appetite, you could look to higher-risk areas such as high yield or emerging market bond funds, which have a higher yield, as this week’s 'Big Theme' on pages 43-44 explains.
Flexible investment remit
Good long-term performance
Attractive yield
Experienced manager
Short-term underperformance
But these types of funds are too risky for many investors, so a slightly less racy alternative is strategic bond funds. These can invest across the fixed-income spectrum in an unconstrained way, focusing on the areas that look best and, very importantly, avoiding less desirable ones. So if, for example, emerging market debt happens to be a good place to invest they could have an allocation to it, but because they are not bound to invest in that area, when things are looking less good, they could move away.
Picking and avoiding the right areas relies on the ability of a strategic bond fund’s manager, so it is important to select one with a good record. Examples include Jupiter Strategic Bond Fund (GB00B544HM32), which has been run by Ariel Bezalel since launch. The fund aims for income with the prospect of capital growth, and to deliver a return net of fees higher than the Investment Association (IA) Sterling Strategic Bond sector average over the long term. It has succeeded in its aim, beating its sector average over five and 10 years, and it has an attractive 12-month yield of 3.7 per cent.
“Since launch, Mr Bezalel has demonstrated that he has an aptitude for reading the economic cycle,” say analysts at research company FundCalibre. “This [and] solid stockpicking has seen Jupiter Strategic Bond perform well. Mr Bezalel’s emphasis on controlling the downside – how much the value of the fund may fall – has helped it post some exceptional risk-adjusted returns and this sets it apart from many of its peer group.”
The fund can invest in a variety of assets, including high yield, investment-grade, government and convertible bonds, and preference shares. It can also use derivatives for investment purposes.
Mr Bezalel and his team form a view on the global economy to determine how much risk to take. They then select the countries and sectors that seem likely to offer attractive investments, and position the fund in a mix of bonds that they believe suits market conditions. They thoroughly analyse every company and government bond in which they invest.
They favour companies and governments that are committed to paying down their debts and have the financial strength to meet all their obligations to bondholders, such as paying regular interest payments and fully repaying capital when the bonds mature.
At the end of November, the fund was relatively defensively positioned, with over half its assets in bonds rated triple-B or higher, which are considered the least likely to default, and 5.8 per cent in cash. The average rating of its holdings was BBB+.
However, the fund still has meaningful exposure to higher-risk bonds with lower or no ratings, and because it is a strategic bond fund its allocation to these and its risk could increase.
Jupiter Strategic Bond has also underperformed the IA Sterling Strategic Bond sector average over one and three years, and does not offer such a high yield as some of its sector peers, or emerging markets or high-yield bond funds.
However, the underperformance is very small, and due to the fund lagging its peers last year and in 2017 for reasons including its defensive positioning when riskier parts of the market did well. But in most other calendar years it has beaten the IA Sterling Strategic Bond sector average.
There is also no point in going for funds with the highest yields if they do not make good total returns, and 3.7 per cent is still an attractive yield.
Also, if you have a higher risk appetite and long-term investment horizon, you should be able to tolerate the fund moving to a riskier profile and any volatility this may entail, as over the long term doing this should boost its returns.
So if you are looking for an attractive income and good total returns with less risk than higher-yielding bond funds, Jupiter Strategic Bond looks like a good option. Buy.
Jupiter Strategic Bond (GB00B544HM32)
| PRICE | 66.32p | MEAN RETURN | 3.90% |
| IA SECTOR | Sterling Strategic Bond | SHARPE RATIO | 1.23 |
| FUND TYPE | Unit trust | STANDARD DEVIATION | 2.67% |
| FUND SIZE | £4.16bn | ONGOING CHARGE | 0.74% |
| No OF LONG HOLDINGS | 403* | YIELD | 3.7% |
| SET UP DATE | 2/06/08* | MORE DETAILS | jupiteram.com |
| MANAGER START DATE | 2/06/08 |
Source: Morningstar as at 15 January 2020, *Jupiter.
Performance
| Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | 10-year cumulative total return (%) | |
| Jupiter Strategic Bond | 9.03 | 12.29 | 21.66 | 81.03 | |
| IA Sterling Strategic Bond sector average | 9.28 | 12.47 | 19.89 | 62.35 | |
| Bloomberg Barclays Global Aggregate index | 4.70 | 5.63 | 30.57 | 57.45 | |
Source: FE Analytics as at 13 January 2020
Top 10 holdings (%)
| US Treasury 3.00% 15/02/47 | 5.6 |
| Australia 3.25% 21/06/39 | 5.2 |
| US Treasury 2.25% 15/02/27 | 3.9 |
| Australia 3.75% 21/04/37 | 3.8 |
| US Treasury 2.75% 28/02/25 | 3.2 |
| US Treasury 2.25% 15/08/46 | 3.0 |
| US Treasury 2.00% 15/11/26 | 2.8 |
| India 7.32% 28/01/24 | 2.1 |
| Australia 3.00% 21/03/47 | 1.8 |
| Virgin Media 5.50% 15/09/24 | 1.7 |
Source: Jupiter as at 30/11/2019
Asset allocation (%)
| Government bonds | 45.7 |
| Corporate bonds | 41.70 |
| Floating rate notes | 5.40 |
| Bond futures | 1.00 |
| Convertible bonds | 0.80 |
| Mututal funds | 0.50 |
| Credit default swaps | -8.20 |
| Cash | 5.83 |
Source: Jupiter as at 30/11/2019
