What’s behind the strategic bond love affair?

With net retail sales of some £7.25bn in the first 11 months of 2017, it’s fair to say last year was a good year for the IA Sterling Strategic Bond sector.

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Known as the multi-asset fixed income sector, where managers aren’t constrained by the types of bonds they can hold, the sector took in £5bn between August and November alone, as investors seemingly became much more risk averse in the second half of last year.

At a time of rising inflation and tightening monetary policy, the popularity of bonds overall was described by Hargreaves Lansdown’s senior analysts Laith Khalaf as “hard to fathom”. Given the strength of global stock markets in 2017, he would seem to have point, so what has been driving the interest?

With a return of just 5.23% over the year to 11 January 2018, it’s clear investors are not hunting for alpha in the sector. However, with just one fund losing money over the last 12 months, despite 2017 being a good year for riskier investments, it appears managers within the sector are clearly doing their job when it comes to protecting capital leading to increasing demand.

Indeed, with total assets under management of £52.3bn, the sector is now the 10th largest peer group for UK retail investors, up one place from 11th at the start of 2017. Here we take a closer look at the 84 funds that make up the group, how they have performed and the ones attracting most attention among investors.

The top performer

In terms of returns, the stand out performer in the sector over the last three and five years has been the £1bn GAM Star Credit Opportunities Fund, which is co-managed by Anthony Smouha and Gregoire Mivelaz. Versus the sector average return of 12.46% and 22.57% over the two time periods, the fund is up 32.75% and 68.35% respectively. Over one year meanwhile, the fund is ranked second in the sector with a return of 14.3%, sitting only behind the Tideway Hybrid Capital Fund which is up 17.09%.

Such returns seem to have peaked the interest of professional fund buyers. According to FE Analytics, the fund was the eighth most researched fund within the sector in the fourth quarter of last year. However, when compared with the fourth quarter of 2016, it sits only behind the £53bn Pimco GIS Income Fund as the strategic bond fund which has witnessed the biggest increase in research.

The bigger the better?

In size terms, the biggest fund in the sector, by a considerable margin, is Richard Woolnough’s M&G Optimal Income Fund. With assets under management of £21.8bn, it is is the now the largest retail fund in the UK (excluding Pimco as most of its assets are domiciled outside of the UK), recently usurping Standard Life’s Global Absolute Return Strategies (Gars) Fund, which is £21.1bn in size.

But is biggest necessarily best? Over one year Woolnough’s mammoth fund is marginally ahead of the sector, returning 5.8% which places it 33rd in the peer group. The fund is also second quartile over three and five years with returns of 13.7% and 27.2% respectively.

Explaining the popularity of the fund, Adrian Lowcock, investment director at Architas, says part of the reason the fund is so big is owing to the legacy of the M&G fund range.

He adds: “Woolnough earned a strong reputation during the financial crisis and has proven capable of running money across a wide range of environments and conditions. The size of the funds he runs means that flows in or out of the sector will impact his funds more than others, significantly so.”

The second biggest fund in the sector is Ariel Bezalel’s £3.9bn Jupiter Strategic Bond Fund, has had a much more challenging last 12 months, slipping to fourth quartile after a gain of just 3.6%. Over three years it climbs to third quartile with a gain of 12.3% and over five years it is second quartile in the sector, with a gain of 22.6%. This recent drop off in performance may go to explain why, according to FE Analytics, the fund was the most heavily-researched among professional investors in the fourth quarter of 2017.

Completing the top three most researched funds in the sector were Woolnough’s M&G Optimal Income Fund and the Invesco Perpetual Monthly Income Plus Fund, which is managed by Paul Causer, Paul Read and Ciaron Mallon.

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