Investors won’t have missed the news that bonds are back. With chunky yields, better diversification and lower risk, they present an appealing alternative to volatile equity markets. However, the unpredictable trajectory of interest rates and inflation remains a key risk. A structurally short-duration bond fund may provide a potential solution.
The Jupiter Monthly Income Bond fund has shown its mettle in recent markets. It is first quartile over one, three and five years. Its shorter duration has been an advantage, insulating the fund from the worst ravages of interest rate rises. In 2022, for example, it dropped just 8.1%, compared with an 11% average fall in the wider strategic bond sector.
Manager Hilary Blandy has an impeccable pedigree in credit research. She managed Jupiter’s credit research team from 2016 to 2019, before taking the helm of the fund. It is still primarily a credit-focused fund, aiming to add value through stockpicking.
The fund’s neutral allocation is 50/50 short-duration investment grade and high yield. Blandy says these two asset classes tend to perform in different market conditions, with each dampening the worst effects of the other.
“Investment grade underperforms when rates are rising, high yield underperforms in a risk-off, weaker economy scenario. We think this construct works well as a starting point, giving investors smooth performance through the cycle and in a variety of macroeconomic conditions.”
The high yield gives a boost to the income, which proved important during the low interest rate environment that has prevailed for much of the past decade. However, today, that is less of a problem, with income more widely available across fixed-income asset classes. The yield on the fund is now over 6.5%.
The final element is stockpicking. The shorter duration should mean more of its return comes from credit selection rather than interest rate movements. In addition to Blandy’s background, there are 11 developed market credit analysts on the Jupiter team. “We have a strong team of credit research analysts,” she says. “It’s a genuine partnership. We sit together, we work with them. They are great at generating ideas and creating alpha.”
The team can look at sterling, euro and dollar bonds, though all currency exposure is hedged back into sterling. On the investment-grade side, Blandy has a stronger preference for sterling bonds. In high yield, the fund is divided approximately one-third each on the three currencies. “It’s about being able to look at a broader benchmark than just sterling, which is quite small,” she adds.
This article first appeared in the November edition of Portfolio Adviser Magazine