Strategic bond funds’ role in portfolios has come into question among advisers in recent years as a result of the poor performance of many of the higher-profile fund managers in the sector, particularly in 2022, when the bond market sell-off was broad and deep.
Strategic bond fund managers are a class of fixed income investors with licence to go anywhere across fixed income markets.
The exodus of wealth managers from the space can be seen in data compiled by our sister publication, Asset Allocator, which revealed that even the most popular funds among those covered experienced sell-offs.
The chart below shows the extent of the underperformance of strategic bond funds even relative to a typical cautious portfolio.
Darius McDermott, who runs the VT Chelsea range of multi-manager funds, says: “A number of the high-profile strategic bond funds on the market have performed poorly in recent years.
“The role strategic bond funds are supposed to have in portfolios is to allow clients to outsource their exposure.
“But one of the problems in recent years has been that funds have become very focused on duration as a source of return, and as a fund buyer you have had to be comfortable with a big part of the risk budget you assign to the fixed income allocation being duration.
“We would argue that at this time, duration is not where the opportunities are.”
We see bonds as the tonic in a well-crafted G&T — dependable, understated and designed to bring balance
Alex Ralph jointly runs a Strategic Bond fund at Nedgroup. She says: “When I was first working on strategic bond funds at the turn of the century, they were never intended to be about taking big duration positions. They were supposed to be about duration, and credit and sector allocation.
“A number of the very large strategic bond funds took huge duration positions — if some are taking 10-year duration positions, that will always have a big impact on performance. I would say if an equity fund took a level of risk of that size in one position, the risk department would be worried.”
Her view is strategic bond funds are designed to be “multi-asset bond funds, in that they offer exposure to the various parts of the bond market, not just duration”.
Jon Doyle, an adviser at Juniper Wealth, says: “Strategic bond funds offer flexibility in theory, but in practice they often introduce an unhelpful level of unpredictability.
“The challenge of consistently and successfully rotating between duration and credit risk is significant — and the long-term data simply doesn’t support it.
