Bond Funds for Your Portfolio

Bonds may not be performing as well as equities, but fixed interest is an important part of a well-diversified portfolio

Marianne Weller 22 November, 2013 | 12:15PM
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Following the US Federal Reserve’s comment in May 2013 that bond purchases could slow down by the end of the year given the improving macroeconomic situation in the US, fixed income markets have seen considerable volatility over recent months.  Government bonds were directly impacted with yields rising and bond markets across the fixed income spectrum experiencing outflows. Between May 22 and October 16 this year, the 10-year UK Treasury yield has rose from 1.9% to 2.8%.  Investment grade corporate bonds which have longer duration profiles and relatively low yields also performed poorly especially in June as their correlation to government bonds has increased in recent years as the search for yield and unconventional monetary policies has pushed spreads lower. High yield bonds have fared better as the asset class' short duration characteristics meant it was less sensitive to a rise in interest rates.

Whilst bond markets have steadied to a certain extent over the third quarter, the consensus view is for bond yields to rise gradually even though interest rate rises may be a long way off in the US.  In addition, other major economies such as the UK and Europe are still in a fragile state and the Bank of England and European Central Bank have not altered their stance and continue to maintain an accommodative monetary policy.  Indeed, a number of managers we talk to have highlighted that it has been hard to call the direction of government yields and bond prices this year and expect markets to remain volatile. Against this backdrop, investors are unsurprisingly concerned about their allocation to fixed income.  In this environment, a more flexible approach to fixed income investing may be needed and Strategic Bond funds could have an increasingly important role to play in an investor’s portfolio.

The Sterling Strategic Bond sector only came into existence in 2008 growing out of the Other Bond category.  The sector’s definition is very loose with the only requirement being that "funds must invest at least 80% of their assets in Sterling denominated (or hedged back to Sterling) fixed income securities".  Strategic bond funds have the flexibility to invest globally across the different fixed income markets including government bonds, investment grade, high yield bonds and emerging markets debt.  In markets that have become more sophisticated with an increasing use of derivatives, these funds offer actively managed fixed income exposure.  A key feature of the sector is the fact that they can actively manage their duration.  Managers use derivatives such as interest rate and government bond futures to try and manage the fund's overall duration.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Aegon Strategic Bond GBP A Acc240.48 GBP-0.09Rating
Fidelity Strategic Bond34.03 GBP-0.12Rating
JPM Unconstrained Bond A Grs Acc0.77 GBP-0.09Rating
M&G Optimal Income GBP A Acc229.89 GBP-0.09Rating

About Author

Marianne Weller  

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