According to FE Analytics data, Artemis High Income currently has 15.2% in equities, the highest of any fund in the Sterling Strategic Bond sector, whereby Investment Association guidelines allow up to 20% of portfolios to be allocated to the asset class.
However, while the £1.3bn fund, which is managed by Alex Ralph (pictured), is top quartile over one and three years, returning 4.9% and 14.5% compared to 2.2% and 8.8% respectively in the sector, it is bottom quartile in the three months since the start of 2018. Over that period it has lost 1.5% compared to a loss of 1.1% in the sector.
The fund’s March factsheet said equities had “weighed heavily on performance”. Artemis did not wish to comment when contacted by Portfolio Adviser.
Invesco Perpetual Monthly Income Plus has 14% in equities and like its Sterling Strategic Bond sector rival Artemis High Income, has fallen from top-quartile performer over a one-year period to fourth-quartile over a three-month period.
The £3.3bn fund, co-managed by Paul Causer, Paul Read and Ciaran Mallon, has fallen 1.8% over three months, compared to 1.2% falls in the sector. In contrast, it nearly doubled the returns of the sector over a one-year period, delivering 4% compared to the 2.2% average of its peers.
Invesco Perpetual also did not wish to comment. Its March factsheet shows The Co-operative Bank and British American Tobacco are among its largest equity holdings, alongside General Accident preference shares.
Bonds versus equities risk
Architas investment director Adrian Lowcock says he would rather use a pure bond fund for fixed income exposure.
“I buy a bond because I buy bond risk and from a portfolio construction perspective that’s also what you want from a bond manager. I want bond risk, not equity risk.”
Bond fund manager Dickie Hodges, who does not use equities in the Nomura Global Dynamic Bond fund, says investors should look under the bonnet of the top-performing fixed income funds from last year.
“Many of the best fixed income fund managers in 2017 have been best performing not because they’ve been great fixed income managers but because they have 10-20% equity exposure,” Hodges says.
Hodges says that asset allocation decision may have worked last year, but that won’t necessarily be the case as stock markets become more volatile. The Global Dynamic Bond fund is Irish-domiciled and does not sit in any Investment Association sectors, but its GBP-hedged share class has gained 0.67% over three months and 5% over one year.
Hermes Investment Management does not invest in equities in its bond products, says its head of fixed income Andrew Jackson.
Investors should understand there is limited upside in bonds, Jackson says.
He adds: “If you’ve run out of upside from a fixed income product and you have to go and find upside from equities then that probably means the market has got to a point where you should be going to your clients and saying you can’t deliver this from fixed income and maybe they should look somewhere else.”
Structural versus tactical allocation
Chelsea Financial Services managing director Darius McDermott says the Artemis High Income and Invesco Perpetual Monthly Income Plus funds have structural allocations to equities, whereas other funds make tactical allocations, such as the M&G Optimal Income fund, managed by Richard Woolnough. According to its February factsheet, the M&G fund has 4.6% in equities.
McDermott says both the Artemis High Income and Invesco Perpetual Monthly Income Plus funds have good long-term track records.
“The Invesco fund has always been a favoured fund of our clients because it’s traditionally paid a stable and high monthly yield. I have no problem with bond funds holding equities as long as we understand what they’re doing,” McDermott says.
While Axa Framlington Managed Income holds the third highest allocation to equities in the sector, at 12.1%, its performance has taken less of a hit in than the Artemis and Invesco Perpetual funds. Its first quartile performance over a one-year period has fallen to second-quartile in the three-month period, with respective returns of 4.2% and -1% over those periods.