Investors urged to do research before choosing a strategic bond fund as popularity soars

News - Funds

Written by Ray Clancy

Thursday, 10 June 2010 12:00

Investors need to undertake thorough research before picking a strategic bond fund or risk getting into a strategy that does not meet their aims, it is claimed.

Strategic bond funds have risen greatly in terms of their popularity among investors and have appeared in the top three of the Investment Management Association sector list for the third month running.

But the flexible nature of the strategic bond sector means that unless thorough research is carried out some investors could find themselves in a fund that does not meet their investment objectives, according to Fidelity International Portfolio Manager Eugene Philalithis.

He points out that fundamental differences around risk, volatility and diversification exist between funds in the strategic bond sector in the current uncertain economic environment because of their flexible nature.

‘The fund manager can change the balance between different types of bonds, giving the funds the ability to respond to changes in the market. However, the scope available to managers is so vast that funds can vary greatly in terms of risk, volatility and diversification,’ he explained.

‘Some strategic bond funds take care of an investors entire bond portfolio very well, but the sector accommodates many other funds that adopt very different strategies. The fundamental differences between funds in the sector are arguably greater than those in, say, any of the UK equity sectors and investors should be aware of this when selecting their funds,’ he added.

He believes that investors need to think about what they are trying to achieve from their fixed income allocation, whether it is income, equity diversification or low volatility, and do their research to choose the most appropriate funds for their needs.

The main aim is to understand what the manager is trying to achieve and deciding whether it fits your strategy. So you should understand which bonds the manager is buying - government, investment grade and high-yield, why - what drives their buy, sell and hold strategy, and in what proportions.

And once the decision about which are the best funds is made, it is necessary to establish an acceptable review process to monitor the ongoing performance and suitability of the fund.

‘For every all weather fund, there is a targeted fund playing a specific strategy. An example might be a defensive high-yield fund that plays the under-researched securities that sit on the border of investment grade and high-yield bonds. Within the tight confines of this borderline, the manager alters their exposure to high-yield and investment grade and so the fund is a strategic rather than a conventional bond fund,’ said Philalithis.

‘This means the strategic bond fund has something for everyone. There are broadly managed funds for investors who wish to leave their fixed income to a professional manager. And for experienced or professional investors capable and willing to manage their own bond asset allocation, the sector is also a goldmine of opportunity,’ he added