Buy safe assets via Allianz Strategic Bond

A good way to get exposure to them is Allianz Strategic Bond Fund (GB00B06T9362). This fund currently has a substantial portion of its assets in government bonds, so is more defensive than global bond indices and many other Sterling Strategic Bond funds. Since Mike Riddell started running the fund in December 2015 its average annual volatility is 4.26 per cent, in contrast to 9.24 per cent for Bloomberg Barclays Global Aggregate index. 

Allianz Strategic Bond makes better relative returns during equity market downturns because this is when government bonds make better returns. Over the past year, the fund has returned 7.9 per cent, ahead of Bloomberg Barclays Global Aggregate index's return of 6.1 per cent and the Investment Association (IA) Sterling Strategic Bond sector average return of 2.2 per cent.

Mr Riddell cut his teeth as part of the well-respected M&G Investments bond team. He is particularly focused on currency risk, so relies less on longer-duration bonds and bonds with higher credit spreads to boost returns, as these can be riskier and more volatile.

According to data company Morningstar, this fund's holdings overall have an average credit rating of AAA. AAA-rated bonds are considered least likely to default. The fund's holdings also have an average duration of 3.89 years, so are also only moderately exposed to the risk of rising interest rates. By contrast, the average credit rating of the holdings of funds in the Morningstar Global Flexible Bond sector is BB, and their average duration is 5.09 years.

Allianz Strategic Bond has 61 per cent of its assets in government bonds, whereas its Morningstar Global Flexible Bond sector peers, on average, have 19 per cent of their assets in them. 

The fund is also diversified by region and currency, with only 27 per cent of its assets in dollar-denominated bonds, despite this being the world’s largest market. It also has, for example, 11 per cent of its assets in each of Czech Koruna and Canadian dollar-denominated bonds. But the majority of the fund's assets are hedged back into sterling in line with its sector requirements. 

Central bank purchases of government debt have pushed up the prices of safe-haven assets, such as government bonds, in the UK, US and eurozone. But as central banks are planning to withdraw this support and are thinking about increasing interest rates, the prices of these, particularly those with a longer maturity, could come down. 

As this fund currently has a defensive allocation, if equities or corporate bonds rise strongly it is likely to underperform other strategic bond funds and Bloomberg Barclays Global Aggregate index. For example, equities have generally risen since December 2015 so its longer-term returns are less impressive. Since Mr Riddell started running it, the fund has made a return of 13.1 per cent, versus 27.6 per cent for the index and the IA Sterling Strategic Bond sector average of 13.3 per cent.

Strategic bond funds such as this one can also change substantially. Although this fund is currently defensive, its risk profile could be very different in a few months' time if its manager changing its asset allocation.  

However, with the global economy in the latter part of the economic cycle demand for defensive assets among other buyers might increase. Mr Riddell also has a good record of making the right asset allocation calls, and the fund's ability to invest across the fixed-income universe means he can move it out of areas where he thinks there are problems. 

So if you want a more defensive element in your portfolio, and have a high enough risk appetite to tolerate a change in this fund's risk profile, Allianz Strategic Bond still looks like a good way to help protect your portfolio. Buy. TL

Allianz Strategic Bond Fund (GB00B06T9362)

Source: Allianz Global Investors, *Morningstar as at 03/04/2019

Performance

Source: FE Analytics as at 02/04/2019

Top 10 holdings as at 28/02/2019 (%)

Source: Allianz Global Investors 

Sector breakdown as at 28/02/2019 (%)

Source: Allianz Global Investors