When it comes to fixed-income exposure, we have often advocated the use of strategic bond funds. They are flexible, moving in and out of different parts of the bond market in response to changing circumstances, and tend to have well-resourced teams. Backing such funds has been an easy way to get diversified bond exposure, provided you understand (and agree with) some of the big calls made by a given manager.
Look at the events of the past two years, however, and there is an argument that things have changed. Bond prices are much lower and yields much higher, giving investors some good prospects for both income and total returns from across the fixed-income universe. Investors might now want something much more targeted, such as a specific subsector (from high yield to government bonds) or even to lock in a juicy yield by buying bonds directly.
This begs the question: have strategic bond funds been earning their keep? They often promise a diversified one-stop shop that saves you from having to research and hold several bond funds. But with higher returns on offer, we might now ask if going more granular comes with better rewards.
The strategic bond fund sector is a large and disparate one, but we can look at how some of the biggest names in the space have performed over time. To start with a household name, the £2.6bn Jupiter Strategic Bond Fund (GB00B4T6SD53) has tended to straddle different parts of the bond market, recently having a 31.5 per cent allocation to government bonds and 61.7 per cent in corporate debt, with a mixture of different credit ratings and sector leanings. Manager Ariel Bezalel has long taken the view that various structural factors should weigh on the global economy.
But what of performance? The fund does offer something pretty middling: like many of its peers, it suffered badly in 2022, losing around 16 per cent, and had a better 2023 with a gain of nearly 9 per cent. What's less impressive is that that has contributed to a cumulative return of just 6.4 per cent in the five years to 16 January.
To put this in context, the fund does sit between some of the more extreme instances of bond fund performance over such periods. Its 2022 loss is much less severe than the 23.9 per cent hit taken by the average gilt fund, while its 2023 gains also outpace a gilt fund but lag the 9.4 per cent average return from the Investment Association's Sterling Corporate Bond sector and the 11.1 per cent return from its High Yield cohort.
Janus Henderson Strategic Bond Fund (GB0007533820), another big name from the sector, has had an even worse showing lately, losing more than the Jupiter fund in 2022 and rebounding less strongly in 2023 than its rival. However, that may reflect a fairly decisive call by the team to load up on government bonds and increase the portfolio's sensitivity to interest rate changes.
Such positions are worth understanding if you back a flexible fund, but more granular options do exist for investors wishing to, for example, bet on interest rates having peaked. With the fixed-income universe looking much more exciting than it once did, strategic bond funds with middle-of-the-road performance have to do more to win people over.
