Royal London Sterling Extra Yield Bond: is it a strategic bond fund?

aroominyork

I understand strategic bond funds to be those which have flexibility to invest 'across the fixed income universe', ie corporate and government bonds and different investment grades.

Royal London's Sterling Extra Yield Bond is benchmarked in its own literature as well on trustnet against strategic bond funds. Yet from what I can see it is a corporate bond fund: its policy is "The Fund invests in a range of bonds including investment grade bonds (those of higher credit quality) and unrated bonds. The Fund also invests in sub-investment grade bonds (lower credit quality) which pay a higher rate of interest. At least 75% of the Fund's investments will be in sterling denominated securities. The Fund may use financial derivatives, but for efficient portfolio management purposes only." That reads to me as being corporate only and the fund's top ten holdings are all corporate bonds, thoughI haven't been able to find a full list of holdings.

So what's happening here please?

bowlhead99

Strategic bond funds use their judgment to invest where they like within their remit.

This fund is allowed to invest in a broad spectrum of things:

one class of investments it can use is "investment grade" bonds (with high credit ratings e.g. AA);

it also invests in bonds which are sub-"investment-grade" (with lower credit ratings e.g. C);

it can also invest in bonds that are not even reliably credit rated by agencies;

it can also invest in bonds that are not issued by UK issuers (up to 25% of portfolio).

So, a reasonably broad remit. It could invest in an AAA bond or an unrated bond. It could invest in a UK bond or an overseas one.

The name of this particular fund contains the phrase "extra yield" so presumably they are looking to deploy your money across assets which offer relatively high yields rather than low yield ones.

A fund that can invest across the credit spectrum but which is focused on earning 'extra yield' is not going to put a lot of its portfolio in AA rated UK 10 year gilts yielding 1.4%. Because that doesn't sound much like "extra yield", it sounds low. Because low yield is what UK gilts are paying right now. You'd expect it to be invested in other stuff instead .

When you looked at the top holdings, you found those holdings were indeed in other areas. So, I'm not sure what your problem or issue is.

I haven't looked at the fund myself, am only going at what you told us...

ColdIron

Don't forget that with a yield of 5% to 6% it has a high income remit and pickings will be pretty thin in sovereign debt at this point so it's finding opportunities further down the credit scale as seen in the credit breakdown. Different funds with different objectives will have different weightings

aroominyork

So it would rarely invest in gilts because of its high yield remit. I understand that. But given the policy only references corporate bonds, why is it not benchmarked against the corporate bond sector?

firestone

if you look at the fund on HL under the our view section it gives quite a good write up as to how the fund works & a view as to why its different to others in the sector at the moment.And to be fair what ever its doing it seems to be doing it well

aroominyork

firestone wrote: »

if you look at the fund on HL under the our view section it gives quite a good write up as to how the fund works & a view as to why its different to others in the sector at the moment.And to be fair what ever its doing it seems to be doing it well

I agree it's done well (though, for what it's worth, it crashed and burned in 2008) but HL just gives the usual guff: "... individual bond selection being a driver of returns... fund focuses on individual bond selection... manager searches for attractively valued bonds, assessing the return likely to be received from each position compared to the inherent risk... aims to add value by identifying 'special situations'". But that does not answer my question of why it's not benchmarked as a corporate bond fund given its stated policy.

firestone

think the same could be said for others such as GAM credit opps which i hold and is in the same sector on Citywire as the RL.In a couple of years they could hold bonds/gilts etc from different areas which is the strategic remit i guess

aroominyork

firestone wrote: »

think the same could be said for others such as GAM credit opps which i hold and is in the same sector on Citywire as the RL.In a couple of years they could hold bonds/gilts etc from different areas which is the strategic remit i guess

GAM's policy specifically mentions government bonds and although its main focus is junior bonds it does hold a small amount of gilts. So the same could not be said.

ColdIron

A strategic bond isn't constrained to just just corporate bonds. Just because it only has 1.3% in AAA/AA/A rated bonds and 21% in BBB rated bonds now doesn't mean that it couldn't increase this in the future. It's policy states it can invest in investment grade bonds (BBB or better) and this would include large companies and banks through to debt issued by the UK, US etc

aroominyork

ColdIron wrote: »

A strategic bond isn't constrained to just just corporate bonds. Just because it only has 1.3% in AAA/AA/A rated bonds and 21% in BBB rated bonds now doesn't mean that it couldn't increase this in the future. It's policy states it can invest in investment grade bonds (BBB or better) and this would include large companies and banks through to debt issued by the UK, US etc

Agreed, and the fund's policy lets it invest in pretty much any corporate bond. But that's not my point: my point is that its policy is corporate bond only but it's benchmarked against the strategic rather than corporate fund sector.

ColdIron

What makes you think that 'its policy is corporate bond only'?
It's policy allows it to invest in investment grade bonds. They can be corporate bonds and government bonds