Investec Strategic Bond Fund research update

Heather Ferguson | Wed 08 April 2015

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Bond markets could face a difficult time ahead. Should the UK and US economies continue to improve, central banks could be encouraged to normalise monetary policy by increasing interest rates. Higher interest rates make the fixed income from bonds relatively less attractive, driving prices down as investors are prepared to pay less for them.

Traditional bond funds can struggle in this environment. However, strategic bond funds are highly flexible and have a wide array of tools which could be used to provide an element of shelter against rising interest rates.

The Investec Strategic Bond Fund has been managed by John Stopford since November 2006 and co-manager Seamus Vasey from December 2013. The fund has underperformed the sector for the majority of the past three years, due mostly to its cautious positioning. Recently, the managers have been concerned about the impact rising interest rates in the UK and US might have on bond prices. As such, the fund's duration (its sensitivity to interest rates) in these areas has been reduced. As interest rates have yet to rise, this has hurt short-term performance. In addition, although the manager can invest in higher-risk, high yield bonds, the amount in this area is currently fairly low. The majority of the fund is invested in investment grade bonds with 74% allocated to this lower-risk end of the bond spectrum.

The managers are currently finding value in European bonds which they feel will continue to perform well on the back of quantitative easing and low inflation. As such, they have increased exposure to the region with European (excluding UK) bonds currently accounting for 11.2% of the fund.

The fund has the ability to engage in short positions to profit from falling prices. The managers are currently shorting the euro, other European currencies, and currencies they feel are strongly linked to commodity prices. Elsewhere, holding US dollars has been beneficial to performance as the currency has strengthened over recent months.

Our view on this fund

Over John Stopford's tenure, the fund has returned 38.9% compared with 41.1% for the average fund in the sector and currently yields 3.02%. Although, past performance is not a guide to future returns and the yield is variable and not guaranteed. The fund tends to shelter investors' capital well through market downturns. For example, it fell to a lesser extent than its peers during the financial crisis. However, the managers' cautious positioning has meant the fund has failed to fully capture the gains throughout the subsequent recovery.

In our view, the managers' sensible approach could serve investors well over the long-term; however, we currently have greater conviction in other managers in this sector. The fund therefore does not feature on the Wealth 150 list of our favourite funds across the major sectors.

Past performance is not a guide to future returns. * Lipper to 01/04/15

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.