3 Bond Funds to Profit Through the Uncertainty

Bond market uncertainty remains in 2016 - despite the Federal Reserve taking action and raising rates. Strategic bond funds have the tools to manage price fluctuations

Emma Wall 22 January, 2016 | 8:49AM
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Emma Wall: Hello and welcome to the Morningstar Series 'Ask the Expert'. I'm Emma Wall and I'm joined today by Morningstar fund analyst, Ashis Dash.

Ashis Dash: Hi, Emma.

Wall: Hi, Ashis, so we are having a look today at the bond sector. It's been in the news quite a lot, because if we have a look back to 2015 unfortunately it was an unpopular asset class with U.K. investors. They have seemed to flee all the bond funds in favor of equity funds and I suppose that's because the macro backdrop suggested that soon we were going to enter a bond bear market. That hasn’t quite materialised has it, what happened last year?

Dash: So indeed the fixed income as an asset class, was out of favour last year. This was due to a host of factors.

Wall: Having said that, of course we've come to 2016 and unfortunately a lot of that uncertainty remains. We were told after the first Fed rate hike last month that we were going to expect to have four to six more rises this year. They've already come back on that and said it maybe one or two or even they may reduce the rate, but that was one sector that actually did okay last year amongst all this turmoil wasn’t there.

Dash: Yes, actually there was. So it wasn’t doom and gloom all across the fixed income asset class sector, such as the global fixed income, global flexible bond category did see inflows through there. We also had the European high yield which saw inflows in 2015.

Wall: Perhaps we could highlight a couple of funds in that sector than that Morningstar analysts like.

Dash: Sure. The first one within that sector is the Artemis Strategic Bond Fund. This fund has been run by James Foster and Alex Ralph since its inception in 2005. Although it's a very small team we think they play to their strengths with Foster focusing on investment grade opportunities, whereas Alex Ralph focusing on the high yield opportunities. The strategy is quite high conviction and results in 50 to 100 issuers within the portfolio. So that is relatively more concentrated versus its peers.

Although it has a flexibility to invest across the fixed income spectrum, they tend to stick to U.K. and European names, but also have U.S. names from time-to-time. The combination of this has resulted in very strong returns over the years. But the high conviction approach does mean that there will be some -- certain years like 2008 when the fund might deliver or not be in the top two quartiles.

Wall: That’s a Silver Rated fund, isn’t it?

Dash: Yes, so that’s rated Silver by the Morningstar analysts.

Wall: And I believe the other two funds that you wanted to highlight today from the same management team are also rated silver.

Dash: The other two funds are also rated Silver and these are part of the suite of funds managed by Henderson by John Pattullo and Jenna Barnard. The first one is the Henderson Strategic Bond Fund. Again Pattullo has been managing this since 1999, since the launch in 1999, with Jenna Barnard joining as a co-manager in 2006, although the two of them have worked together since about 2003. We have a very high regard for the two of them, we think they are very talented fixed income managers and they have shown the aptitude to analyse the economic cycle and place the fund accordingly.

Obviously they have support from nine other managers at Henderson and the big fixed income data analyst team as well. Again this portfolio as well can be quite unconstrained and flexible. However the managers here have shown a bias towards high yield [bonds] generally, and corporate bonds. High yield over the last 10 years would have been anywhere between 20% to 80% of the portfolio. The managers are quite active in managing the duration as well.

Wall: And that’s the Henderson Strategic Bond Fund and the second one you wanted to highlight was the Henderson Fixed Interest Monthly Income Fund, wasn’t it.

Dash: Again that is managed by the same team and also rated silver by Morningstar analysts. This is managed in a very similar to the Strategic Bond Fund. So John Pattullo and Jenna Barnard took over the fund in June 2011. And they are joined by Nick Ware as a co-manager in Jan 2014. The difference between this and the Strategic Bond Fund are primarily two. One being this is more focused on income on a monthly basis for investors and the second is the use of derivatives. Whereas a Strategic Bond Fund does use derivatives extensively for expressing the credit fuse and for duration management, this fund tends to be little less aggressive on that front. So these were again just as the Strategic Bond Fund this also expresses their views through a lot of high yield bonds.

And just to reiterate all the three funds that we've mentioned here. They have very high conviction approach. They have a bias towards high yield. So over the long term these have generated very strong and solid returns. But given their biases you would expect them to have volatile periods, short term volatile periods in the middle.

Wall: Ashis, thank you very much.

Dash: Thank you Emma.

Wall: This is Emma Wall from Morningstar. Thank you for watching.

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
Artemis Strategic Bond R Monthly Acc0.99 GBP-0.49Rating
Janus Henderson Fxd Intr MthInc Inc19.28 GBP-1.56Rating
Janus Henderson Strategic Bond I Acc349.25 GBP-1.15Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar