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A contrarian choice in £ Strategic Bond

The case for Artemis Strategic Bond.

Christopher J. Traulsen, CFA 4 February, 2009 | 10:54AM
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£ Strategic Bond is one of the new sectors the IMA graced us with last August when it finally split up its rickety "Other Bond" group. It sounds rather good. One would like to have a "strategic" fund, with all the connotations of careful planning, wiliness, and thoughtful portfolio positioning the term evokes. Certainly it must be better than a non-strategic fund. Marketing genius.

Unfortunately, the new sector looks like nothing so much as the rump-end of the old "Other Bond" group. Here we find offerings such as AEGON Global Bond rubbing shoulders with Baillie Gifford Corporate Bond, Henderson Preference & Bond, and UBS Broad Bond Market UK Plus. It is, in other words, a heady mix that makes peer group evaluation somewhat sweat inducing. All of that said, we will operate here under t

he assumption that investors seeking a "strategic" fund want something that has relative freedom to roam across sectors, maturities, regions, etc.--in short, and in keeping with the name, to strategise.

In that context, we'll plump this week for a somewhat contrarian pick in the form of Artemis Strategic Bond. In a wide-ranging bond fund, you want someone who has been through a few credit cycles, and this fund has that in managers James Foster and Alex Ralph (Ralph joined Artemis from F&C Asset Management in 2005). Foster has 18 years of fixed-interest experience under his belt, including his former role at as Head of Credit at ISIS (now F&C). For her part, Ralph has been a credit analyst since 2000 and started specializing in high-yield mandates in 2002. The pair has worked together for eight years, going back to their ISIS days.

The managers run the fund using a combination of top-down analysis and bottom-up credit selection. To develop their top-down perspective, the managers look at factors such as inflation and interest rates and the credit and default cycles and position the portfolio accordingly. The pair do their own credit analysis work. Ralph is primarily responsible for high-yield credit selection, while Foster performs sector analysis for the investment grade area. Foster believes that individual bonds in the latter are often highly correlated so he seeks to add value through sector calls. Analysis of individual names is much more important in the high yield area: Here they seek out companies with weak balance sheets, but strong enough cash generation and franchises to suggest they are capable of strongly paying down debt and potentially garnering a credit boost.

Investors considering this fund need to be aware of a couple of things: First, it usually features a largish-high yield stake. This comes with risks--in 2008, for example, the fund posted a 19% loss as investors shunned lower-quality issues and default rates ticked up. Second, Fortis is currently looking to sell its majority stake in Artemis. In general, such sales have the potential to lead to manager turnover, fee increases, and fund mergers, but we believe the strong leadership of Mark Tyndall and his history of doing the right thing for fund owners mitigates major concerns in this area. Finally, the fund hedges all currency exposure back to Sterling. This removes a potential source of value and diversification, but should help keep returns from veering far afield from Sterling bond norms.

Morningstar fund analyst Nitya Pandalai Nayar contributed to this article.

A version of this article previously appeared in Investment Adviser, Financial Times Ltd.

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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About Author

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.