Strategic bond funds, especially RL Sterling Extra Yield Bond

aroominyork

Given the widely expressed view that the bond bull run may be over, it seems that investing in bonds – which for me would be a strategic bond fund – only makes sense if seeking positive return rather than just mitigating equity risk. If expecting little in the way of upside I would remain in cash.

Looking at strategic bond funds with a history of good upside, Royal London Strategic Bond Fund tops the charts for pretty much any period in the last ten years. So the issue is the level of risk. Its worth noting that despite its name the fund is benchmarked against strategic rather than high yield bond funds. It is also curious that it is benchmarked against strategic bond funds given that it has practically no exposure to gilts; isn’t it in truth a corporate bond fund?

In terms of performance, looking at HL's research, it took a huge hit compared to the sector around the time of the 2007-2008 crisis and took a while to recover its feet.

Clearly the manager Eric Holt is highly skilled at selecting sub-investment grade and unrated bonds, which make up nearly three-quarters of the portfolio, but is the downside risk too great?

masonic

The downside risk is too great for me, considering not only an economic downturn but also rising interest rates potentially at the same time. This fund would likely be in a bad place just at the time I'd be looking to rebalance from it to equities, so I don't have a place for it in my portfolio.

Alexland

It might be a good investment for someone very adventurous but not me.

My taste is moving towards the simple yin/yang of volatile global equities and safe government bonds.

Alex

bxboards

I've got a large chunk of this in my SIPP with HL, and also another similar Royal London bond.

Always been fairly pleased with them, I hold them as INC rather than ACC, so the income usually goes into buying low cost trackers.

aroominyork

masonic wrote: »

The downside risk is too great for me, considering not only an economic downturn but also rising interest rates potentially at the same time. This fund would likely be in a bad place just at the time I'd be looking to rebalance from it to equities, so I don't have a place for it in my portfolio.

So where would you look? The Jupiters/M&G Optimals look too cautious to be worth the risk over cash. I currently hold Sanlam/Man GLG Strategic Bond which I think does the trick for me; this thread is intended to sense-check that.

Prism

It depends why you want a bond fund.

Index linked gilts are good versus inflation but are very volatile so not great for drawing down on.
Standard gilts seem the way to go to protect against an equity crash but struggle to beat bank fixed savers.
Strategic bonds depend very much on the manager I guess. Need one with a reasonable amount of gilts vs corp bonds.

masonic

aroominyork wrote: »

So where would you look? The Jupiters/M&G Optimals look too cautious to be worth the risk over cash. I currently hold Sanlam/Man GLG Strategic Bond which I think does the trick for me; this thread is intended to sense-check that.

If you can hold cash and get a return on it, that's not a bad option. I'm holding M&G Optimal in my S&S ISA (I've held this over the long term and it's delivered about 7% annualised returns - that probably won't continue), and a combination of cash / liquid P2P outside of it (delivering in the region of 4%). Preservation of capital during the 2008 crisis is a prerequisite for me to consider a bond fund, but also other characteristics such as duration, geographic and corporate:government split. Pickings are fairly slim in my view.

short_butt_sweet

aroominyork wrote: »

Its worth noting that despite its name the fund is benchmarked against strategic rather than high yield bond funds. It is also curious that it is benchmarked against strategic bond funds given that it has practically no exposure to gilts; isn’t it in truth a corporate bond fund?

perhaps; but if you're going to pay the higher cost for active management, then there's little point in the manager buying gilts, since they are very unlikely to add enough value to justify their charges with gilts, which are low-return and all much like one another. with high-yield bonds, they are not all like one another, so there is more possibility of an active manager adding value.

if you want to hold both gilts and high-yield bonds, then perhaps hold a cheap gilts tracker fund and a active (mostly) higher-yield fund. whether you're better off with the latter fund being called "high yield" or "strategic" is another question. personally, i don't want the fund manager to be guessing the direction of interest rates or currencies, which some "strategic" managers may be doing; i think they are more likely to add value by concentrating on assessing bond issuers' creditworthiness and other details about individual bonds.

if you also want some exposure to investment-grade corporate bonds (which have less risk/return than high-yield corporate bonds, but more than gilts), then again it's often not worth paying for active management, because there is not that much difference between investment-grade bonds from different issuers. though vanguard have a few active funds for (mostly) investment-grade corporate bonds which only cost marginally more than trackers, so they might work out.

aroominyork

Prism wrote: »

It depends why you want a bond fund.

Index linked gilts are good versus inflation but are very volatile so not great for drawing down on.
Standard gilts seem the way to go to protect against an equity crash but struggle to beat bank fixed savers.
Strategic bonds depend very much on the manager I guess. Need one with a reasonable amount of gilts vs corp bonds.

This post made me look at the comparative performance of index linked and standard gilt index funds and I saw the former have pretty consistently outperformed the latter. Could someone point me to a good source of info to understand different types of gilts?

aroominyork

Thinking more about this two points come to mind.

First, when comparing the RL fund to a UK all share index there is not a world of difference in performance over the last ten years (although RL held up well this October) and if you go back to the 2007-08 financial crisis the RL fell more sharply than the all share index. So should the RL, which is 65% UK bonds, be considered a UK equity proxy fund rather than a traditional bond fund?

Second, short butt’s post #8 looks like good advice: to split the FI allocation between gilts and bonds and choose a low cost tracker for the gilt element, ie not pay the manager a sizeable chunk of any likely gain to predict interest rates and currencies.

masonic

aroominyork wrote: »

Second, short butt’s post #8 looks like good advice: to split the FI allocation between gilts and bonds and choose a low cost tracker for the gilt element, ie not pay the manager a sizeable chunk of any likely gain to predict interest rates and currencies.

Yes, that's one way of doing it. But the idea behind strategic bond funds is for them to have a fairly wide remit so that they can move between short and long dated bonds and between Government, investment grade and high yield at different points in the economic cycle. If you want fixed allocations (or care to dabble with allocations yourself) then the argument for a passive fund is strong.