The two bond funds featured in this update of our funds Premier League are Jupiter Strategic Bond and Royal London Ethical Bond, managed by Ariel Bezalel and Eric Holt respectively.
The sterling corporate bond sector debuts in this edition, with Royal London Ethical Bond being picked from a pool of nearly 70 bond funds.
Holt's holding has seen three-year returns of five per cent more than its sector's average. Meanwhile, Bezalel's Jupiter bond has also outperformed its sector comfortably.
Below, Bezalel explains how macroeconomics and surviving the Lehman Brothers collapse in 2008 factors into his fund's success and Holt tells us how his ethical stance effects his current portfolio.
Strategic bond sector - Jupiter Strategic Bond
Managed by: Ariel Bezalel
Ariel Bezalel's Jupiter fund was launched in 2008, shortly before Lehman Brothers collapsed, and so had to learn very fast how to stay afloat in choppy waters.
Bezalel puts the fund's success in that respect down to its 'go-anywhere' capabilities, enabling him to invest globally and across the ratings spectrum in the search for income and, if necessary, capital protection.
'That wide remit means we can position the portfolio to benefit from a variety of investment conditions,' he says. 'During the risk-on/risk-off environment of the past few years this has been especially helpful, as it gave us the flexibility to exploit special situations when the market appeared overly pessimistic.' The fund reflects both top-down and bottom-up investment considerations. Bezalel explains: 'Our macro-economic views help us to determine how 'risk on' we want to be, and therefore how much high yield we might want to hold.'
On a bottom-up basis, Bezalel cites recent successful sector calls including UK banks and oil-rig financing. But despite his broad mandate, he favours 'relatively defensive industries'.
Sterling corporate bond sector - Royal London Ethical Bond
Managed by: Eric Holt
With over 250 holdings in the portfolio, manager Eric Holt is a strong proponent of diversity as a key element of risk management. 'Yes, we want the portfolio to reflect our ethical stance - but we keep it broad: we don't want to have to bend over backwards just to find ethically appropriate holdings. 'So the ethical perspective simply means we orient the fund towards certain sectors where we're seeing medium-term value.'
Current favourite hunting grounds include social housing companies, covered bonds, banks such as the Co-operative, structured products, property companies and investment trusts.
Holt emphasises that risk management and mitigation is key, so factors such as the covenant package and debt structure are crucial. 'Credit ratings are important, but they're not the be all and end all of security, and nor are they a tool to recognise value,' he stresses. As a consequence, the fund is very underweight in AAA- and AA-rated bonds. 'The basic question is whether we're getting sufficient reward for the risk we're taking.'
Subscribe to Money Observer Magazine
Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.Subscribe now