3 Bond Funds with a Flexible Approach

Flexible bond funds can provide capital protection as well as growth for investors who want a manager to decide where the best opportunities are

Holly Black 13 November, 2019 | 1:02PM
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Strategic and flexible bond funds have the flexibility to move around different types of bond depending on where the manager thinks the best opportunities are.

As bonds can be a tricky asset to predict, letting a team of experts decide how to position a portfolio can often be a good choice for investors looking for an all-weather fund option, rather than deciding for themselves how to allocate their money across the spectrum of different bonds.

We look at three funds taking an alternative approach to bond investing:

Muzinich Global Tactical Credit

The Bronze-rated Muzinich Global Tactical Credit fund describes itself as an “absolute-return, long-only, multi-sector credit strategy”. What that means is the fund’s goal is to deliver a positive return (in this case Libor plus 5%) by investing across a range of global corporate bonds and bank loans. It aims to deliver growth as well as a high yield – currently it yields 2.8% and has produced annualised returns of 8.3% over five years.

Muzinich uses a “go anywhere” approach, a tactical approach which manager Michael McEachern says may deliver better risk-adjusted returns over the long term as the fund has more sectors and bonds to choose from, so it can steer away from those in which the team believes may have challenges ahead.

Morningstar analyst Louise Babin says the fund has navigated tricky markets well, particularly in 2018. She says: “The strategy has generated solid numbers during its short life – it launched in 2014 – mainly driven by credit sector rotation and security selection.” She rates the experienced manager and well-resourced team but says stewardship at the parent company, which is rated Neutral by Morningstar, “gives us pause for the time being”.

The portfolio is spread across some 275 holdings including debt issued by Budweiser-maker Anheuser Busch, tech giant Apple and drinks company Constellation Brands. Eachern says the fund’s approach means it has more sectors and regions to choose from, which should mean returns are less correlated to global markets.

Jupiter Strategic Bond

Manager Ariel Bezalel begins his investment process by forming a view on the global economy and determining from that how much risk it is appropriate to take at any given time. The team then pick out countries and sectors which offer the best opportunities, taking into account factors such as inflation, interest rates and economic growth.

Currently Bezalel is positioned quite cautiously, with almost half of the portfolio invested in government bonds and a further 44% in investment grade corporate bonds. The largest holdings are dominated by US Treasuries and Australian government debt.

The Silver-rated fund yields 3.8% and has delivered annualised returns of 4% over five years. Morningstar analyst Evangelia Gkeka rates the fund’s flexible investment approach as well as Bezalel’s experience and likes that the fund uses a so-called barbell approach, mixing high-quality government bonds to protect capital with some high-yield debt to provide a greater level of income. Of the collegiate approach the team take in running the fund, Gkeka says: “Each analyst is responsible for fundamental research, recommendation and monitoring of any credit-related events. Decisions are discussed, challenged, and made on the desk, which in our view enhances efficiency.”

BSF Fixed Income Strategies

This Bronze-rated BlackRock fund, which is managed by Michael Krautzberger, invests across a range of fixed income assets, incorporating currency derivatives and cash to achieve its aim of delivering growth and income over a rolling three-year period.

Morningstar’s Gkeka notes that several co-managers have been appointed across BlackRock’s Euro Fixed Income team, reflecting the collaborative approach used to run the fund. She rates the experienced manager, established process and depth of the team and says one of Krautzberger’s key strengths is “combing the team’s views, analysts’ relative value ideas, and inputs from BlackRock’s wider resources into a portfolio that takes an appropriate level of risk for its performance objective”.

The fund’s approach centres on diversification and adding value in a “consistent, incremental manner”. That being said, the portfolio is well-spread geographically, with around 17% of assets in the UK, 12% in the US and around 11% each in Italy and Germany. Almost half of assets are in Government or Government-related debt and almost 9% in cash, making the portfolio fairly cautious currently. It has produced annualised returns of 2.9% over five years.

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
BlackRock Sustainable FxIncStrats D2 EUR136.51 EUR-0.01Rating
Jupiter Strategic Bond I Acc109.90 GBP0.01Rating
Muzinich Global Tact Crdt HUSD Inc S98.05 USD-0.46Rating

About Author

Holly Black  is Senior Editor, Morningstar.co.uk


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