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Protect your portfolio with Allianz Strategic Bond

Allianz Strategic Bond's defensive allocation should provide protection in uncertain times
April 16, 2020

Government bonds are one of the few asset classes that, so far, have been relatively unscathed by the coronavirus sell-off. UK Gilts and US Treasuries, for example, have performed well in both this year’s sell-off and during the final quarter of 2018 when equity markets also registered significant falls. And with equity markets likely to remain volatile in the coming months, the need to maintain defensive positions in your portfolio should not be overlooked.

IC TIP: Buy at 191.69p
Tip style
Income
Risk rating
High
Timescale
Long Term
Bull points

Highly experienced manager

Defensive approach

Strong record in bear markets

Flexibility

Bear points

Uninspiring in calm markets

But while government bonds are one reliable way to do this, it could be better to hold a fund with a flexible investment strategy, rather than one that just invests in UK government bonds. And one such fund that has stood out in recent months and at other times of market stress is Allianz Strategic Bond (GB00B06T9362).

The fund had more than 90 per cent of its assets in government bonds at the end of February – the most defensive part of the bond market. But it diversifies across countries, and its 10 largest holdings included bonds issued by Japan, Norway, Sweden and the US.

It is also diversified across bond credit ratings, although it had a bias towards higher-quality debt at the end of February, with 51.1 per cent of its assets in debt with the highest rating – AAA. However, the fund can invest more widely across the fixed-income universe – as long as 80 per cent of its assets are either denominated in or hedged back to sterling.

The fund is run by Mike Riddell, an experienced bond manager who was part of the highly respected M&G fixed income team before joining Allianz. This experience and the fund's flexible investment mandate have paid off handsomely in times of market stress. For example, when equity markets registered double-digit falls in the last three months of 2018, Allianz Strategic Bond made a total return of 4.6 per cent, ahead of its benchmark, Bloomberg Barclays Global Aggregate index, and outperformed every fund in the Investment Association (IA) Sterling Strategic Bond and UK Gilts sectors.

Even more impressively, between the start of this year and 14 April it made a total return of 17.9 per cent, putting it ahead of its benchmark and every IA Sterling Strategic Bond and UK Gilts sector fund. So Allianz Strategic Bond looks well placed to protect your wealth and offset losses elsewhere in your portfolio if market volatility returns. The fund may also be able to navigate some of the pitfalls associated with the government bond market, such as high prices, because it can diversify across different geographies and issuers.

However, if government bonds suffer price falls in the future – a real possibility due to governments' hefty fiscal stimulus programmes – this could have a detrimental effect on this fund's returns. And government bonds' low yields mean that Allianz Strategic Bond, unlike some other bond funds, should not be considered as an income play – it had a yield of just 1.1 per cent at the end of February. Also, don't assume that the fund will always deliver the outstanding returns it has enjoyed this year.

Instead, you should hold it as a defensive element alongside other holdings that generate income or growth. But this could be a very relevant quality: with the ultimate impact of the coronavirus lockdown remaining difficult to quantify, markets are likely to remain unpredictable and this fund should help to protect your assets in uncertain times, even if it does not deliver strong returns in calmer markets. Buy. DB

 

Allianz Strategic Bond
Price196.71pMean return9.17%
IA SectorSterling Strategic BondSharpe ratio1.31
Fund typeOeicStandard deviation6.32%
Fund size£1.3bnOngoing charge0.65%
No of holdings45*Yield1.38%
Set-up date1 April 2005More detailsallianzgi.com
Manager start dateMike Riddell 30/11/15, Kacper Brzezniak 11/02/19 
Source: Morningstar as at 15 April 2020, *Allianz as at 29 February 2020

 

Performance
Fund/benchmark1-year total return (%)3-year cumulative total return (%)5-year cumulative total return (%)10-year cumulative total return (%)
Allianz Strategic Bond25.53438.7100.7
IA Strategic Bond sector average1.55.912.651.6
Bloomberg Barclays Global Aggregate index10.310.935.258.2
Source: FE Analytics as at 14 April 2020

 

Sector breakdown
Government bonds92.2%
Government-related1.0%
FX derivatives0.6%
Not defined-0.6%
Corporate bonds-1.0%
Cash7.4%
Source: Allianz, as at 29 February 2020. Negative figures may be due to derivative use

 

Credit quality breakdown
AAA51.1%
AA9.1%
A23.1%
BBB1.2%
BB6.0%
<B1.0%
Not rated1.5%
Others0.4%
Cash6.7%
Source: Allianz, as at 29 February 2020