Making the most of opportunities in fixed income

For much of the past decade, fixed income funds were far from being favourite investments at FundCalibre. Because interest rates around the developed world were at rock bottom, investors were forced to take on more risk to achieve a higher yield.

But today, the opportunities are far greater. Some good quality corporate bonds are offering yields of 6% plus, while US government bonds have yields of almost 4%* and UK government bonds are well over 4%**. Today, you are almost being paid not to take risk.

The choice is vast and deciding where to put your money can be challenging, which is why the IA Strategic Bonds sector could be worth considering. Managers of these funds enjoy greater flexibility when it comes to portfolio construction, which means they can consider all types of bonds.

Here, we put the spotlight on four strategic bond funds that we favour, outline their investment objectives, and see how they’re currently invested.

Benefits of strategic bonds

Why are strategic bonds worth considering? The main benefit is the freedom that managers of these funds have to invest across the fixed income spectrum. This means they can increase or decrease exposure to different bond types, depending on the global economic backdrop, political environments, and other factors. It’s why such funds are often seen as one-stop-shops for investors that are keen for someone else to decide which bonds look the most attractive.

So, which strategic bond funds do we favour – and why?

Baillie Gifford Strategic Bond

The first name on our list is Baillie Gifford Strategic Bond, which aims to produce a monthly income from a concentrated portfolio of mainly UK fixed income securities. Stock picking is the primary focus of the fund’s managers, Torcail Stewart and Lesley Dunn, and this helps set them apart from many of their peers.

They look to take advantage of inefficiencies at the stock level and believe that detailed research can enable them to deliver consistent outperformance. We like this approach because trying to forecast interest rate movements and second guess central bankers is notoriously difficult.

Ideas for the portfolio come from both investment grade and high yield bonds – and the fund embraces a variety of business sector exposures. Banking is the most prominent with a 14.6% allocation, followed by 10.3% in financial services, 9.7% in insurance names, and 7.4% in Supranationals***.

GAM Star Credit Opportunities

Next up is GAM Star Credit Opportunities. Its objective is to generate a steady, high income from the bonds of quality companies. The fund’s managers, Anthony Smouha and Gregoire Mivelaz, who boast more than half a century’s combined experience, invest in the ‘junior debt’ of investment grade companies. Their aim is to generate a good income, while maintaining a high quality portfolio. This sees them adopt a buy and hold long-term strategy that’s based on strong credit convictions.

In a recent update, Gregoire emphasised that this year is all about quality – and quality income, which he believes subordinated debt can provide. He also predicted investors would benefit from a high and steady income of 4.5% to 5.5%, independent of market conditions.

“If we combine the attractive valuation levels with supportive fundamentals that we currently have, plus the sector that benefits in terms of profitability of rising rates, we still expect a high single up to double digit price appreciation on top of the income that I mentioned,” he wrote.

Jupiter Strategic Bond

Our third suggestion is Jupiter Strategic Bond, which is a flexible, go anywhere fund that enables manager Ariel Bezalel to explore global opportunities. We like its emphasis on controlling the downside as this has enabled the fund to post some exceptional risk-adjusted returns and set it apart from the pack.

Ariel is hugely experienced and aims to achieve a moderate income from his cautious approach, which includes a focus on limiting potential losses in tough markets. Macroeconomic research and analysis of global monetary policy provides an initial overview of opinions. This is followed by a decision as to which bonds look most attractive.

In a recent video update, Ariel explained his approach was to “cherry pick” the best ideas within fixed income, while taking advantage of the “enormous flexibility” within the strategy.

“We can invest in government bonds, investment grade and high yield bonds – and we have no limits across those different subsegments within fixed income,” he said.

Nomura Global Dynamic Bond

Finally, we have the Nomura Global Dynamic Bond, which takes an unconstrained approach to its pursuit of total returns. Richard ‘Dickie’ Hodges is the man at the helm. His approach is to assess the global economy to identify attractive sectors and themes and then use fundamental analysis to find the best ideas. He also invests across the entire bond range, including government and corporate bonds, as well as emerging market products and inflation-linked assets.

The world of strategic bonds is clearly broad, but Dickie is knowledgeable and experienced when it comes to understanding both the economy and bond securities. This gives us confidence. The United States accounts for the largest geographical split in the fund currently, with a 28.4% share of assets under management****. This is followed by the UK at 14.5%, France at 6.7% and Spain at 3.4%****. There is also exposure to Germany, Italy, South Africa, Mexico, Brazil, and Bahrain****.

*Source: Google finance, 14 June 2023

**Source: ycharts.com, 5 June 2023

***Source: fund factsheet, 31 May 2023

****Source: fund factsheet, 30 April 2023

_{Photo by John Arano on Unsplash}