GAM Star Credit Opportunities GBP, Royal London Sterling Extra Yield Bond and Pimco GIS Income have put in some of the IA Sterling Strategic Bond sector’s best performances when a range of risk and return metrics are examined for the past few years.
Many investors have become concerned about the outlook for fixed income markets, as inflation strengthens across the globe and central banks come under pressure to lift interest rates at a faster pace than had been expected.
Against this backdrop, strategic bond funds – which have the flexibility to invest in a range of bonds and other assets – remain a popular option for investors. With this in mind, FE Trustnet has reviewed the IA Sterling Strategic Bond sector on 10 different measures, although past performance is no guide to future returns.
To find out which funds have consistently been at the top of their peer group, this article will look at the average decile rankings of the sector when it comes to five-year returns up to the end of 2017, the annual returns of 2017, 2016 and 2015, annualised volatility, alpha generation, Sharpe ratio, maximum drawdown and upside and downside capture relative to the sector average.
Performance of fund vs sector and index over 5yrs to end of 2017
Source: FE Analytics
Coming in first place in this research with a score of 1.7 is GAM Star Credit Opportunities GBP. This £719.8m fund, headed up by FE Alpha Manager Anthony Smouha and Gregoire Mivelaz, has a specialist approach that focuses on the junior and subordinated of investment grade companies; the thinking behind it maintains there is a very low likelihood that quality financial companies will default on their debt, therefore the portfolio can pick up extra carry by holding lower tier debt issued by these businesses.
The five FE Crown-rated fund, which is yielding 3.91 per cent, is the IA Sterling Strategic Bond sector’s highest returner over the five years examined in the study. It has also top-decile numbers for its returns in 2017 and 2015 (it was second decile in 2016), alpha generation, Sharpe ratio, upside capture and downside capture.
In their latest update, Smouha and Mivelaz argued that GAM Star Credit Opportunities GBP could continue to perform well in a rising rate environment: “For some time, we have positioned the fund in anticipation of a normalisation of interest rates even if this takes longer than originally anticipated.
“Although we can expect rising rates due to inflation, and there may be unexpected twists and turns in the Brexit negotiations, interest rate hikes are likely to remain limited in absolute terms as growth remains weak, structural deflationary forces due to cost-cutting and technology remain in place and the currency has stabilised. So our current high yields should continue to be beneficial when returns elsewhere remain low.”
Royal London Sterling Extra Yield Bond comes in second place with an average decile ranking of 2.1 across the 10 metrics we looked at. The fund is top decile for five-year returns (the peer group’s second highest at 56.39 per cent), returns in 2015, 2016 and 2017, alpha, Sharpe ratio and upside capture.
Run by FE Alpha Manager Eric Holt, the £1.6bn fund aims to pay out a high level of income through a portfolio largely made up of high yield bonds, although it aims to avoid the level of risk taken by a high yield product. The portfolio currently has 21.6 per cent of assets in bonds rated BBB with 41.1 per cent in BB or below and 35.1 per cent in unrated bonds.
Source: FE Analytics
The next three funds on the list – Pimco GIS Income, Janus Henderson Fixed Interest Monthly Income and AXA Framlington Managed Income – all scored 2.7 in this research.
Pimco GIS Income, which is managed by Alfred T. Murata and Daniel Ivascyn, is the largest member of the IA Sterling Strategic Bond sector with assets of $75.8bn although the bulk of this is from non-UK investors. The fund is in the second decile for its five-year performance, but in the top decile for 2015 returns, alpha generation and Sharpe ratio.
The fund offers exposure to a wide range of fixed income assets but one element that differentiates it from many of its peers is its historic exposure to non-agency residential mortgages. Murata and Ivascyn also tend to look at emerging market debt more than the typical UK strategic bond fund.
The second largest fund in the sector, and one that is more familiar to UK investors, is FE Alpha Manager Richard Woolnough’s £23bn M&G Optimal Income fund. It is ranked 20th out of 64 funds in our research after achieving an average decile ranking of 4.6.
Other popular members of the peer group include Jupiter Strategic Bond (which is in 10th place with a score of 3.6), Invesco Perpetual Monthly Income Plus (in 13th place with 3.7), Janus Henderson Strategic Bond (in 21st place with 4.7) and Fidelity Strategic Bond (in 46th place with 6.9).
At the very bottom of the table is Virgin Income, which has an average decile ranking across the 10 metrics of 9.2. The £492.7m fund is in the peer group’s bottom decile when it comes to five-year performance, returns in 2015 and 2017, alpha, annualised volatility, Sharpe ratio and downside capture.
Performance of fund vs sector over 5yrs to end of 2017
Source: FE Analytics
The fund, which is managed by State Street Global Advisors, has the aim of producing a level of income that is “slightly above” that which would be achieved by investing in gilts alone. It is currently yielding 1.10 per cent.
Six other IA Sterling Strategic Bond funds have an average decile ranking higher than 7.5: HC Kleinwort Hambros Fixed Income, BlackRock Fixed Income Global Opportunities, LF IM Bond, Allianz Strategic Bond, City Financial Diversified Fixed Interest and Old Mutual Monthly Income Bond.