Asset Allocator likes to monitor the use and abuse of various asset classes by DFMs in our database, one of which being strategic bond funds.
What we’ve picked up lately is a relative abandonment by allocators of such strategies, instead preferring to take their own duration calls in-house.
Let’s dive into the details.
Our DFMs tend to split their strat bond picks between five mandates in particular and, in October 2023, these five were held a total of 38 times across portfolios.
Since then, however, we’ve seen ten of these funds sold off in the nine months since we last checked.
Poor performance during tough periods is one of the reasons why some allocators have stopped consulting the experts and have instead decided to give duration calls a go themselves. Getting that right has been arguably the biggest determinant of success or failure for these funds since interest rates began to spike in 2022.
Fahad Hassan, chief investment officer at Albemarle Street Partners, is one of those allocators headed for the exit door.
“Until recently, fixed income managers benefited from a low-inflation environment and central bank support during periods of rising defaults,” he said. “However, the surge in inflation in 2022 exposed the weaknesses of many strategic bond funds, with few managers able to prevent significant drawdowns during the bond bear market.
“Fund managers’ inability to effectively manage duration risk led us to exit our position in a credit-centric strategic bond holding. We take a hands-on approach to managing duration risk in-house which allows greater control and flexibility in adjusting portfolios.”
He added that reduced outsourcing to managers also lowers costs for clients.
Hard times
Mike Riddell’s departure from the Allianz Strategic Bond fund in early May - after his large bet on duration didn't come off - has in many ways been emblematic of the struggles some of these funds have faced.
It remains to be seen whether the new manager, Julian Le Beron, will continue to place a 10-year plus duration bet, as Riddell has been known for.
Interestingly, Janus Henderson Strategic Bond, which is held by five allocators in our database, has now taken its duration bet beyond 10 years, with the fund now having an average duration of 10.11 years - up from 9.89 years in October 2023.
This doesn't appear to have boosted performance. The fund has delivered fourth quartile returns in each of the past three years (including year-to-date). And it is notable that the number of allocators holding this fund has also dropped over the past 12 months from seven.
Jupiter Strategic Bond - another fund with a long bet on duration, now at 9.85 years up from 8.3 years 12 months ago - has also seen the number of allocators holding it drop.
The only strategic bond fund to see an uptick in interest is the Nomura Global Dynamic Bond, run by Dickie Hodges. This is a strat bond fund which has seen its duration plummet recently - from 6.38 years 12 months ago to 3.77 years now.
The Nomura fund is now tied with the Janus Henderson fund as the second most popular strategic bond fund.
Despite the folks at Albert E Sharp calling time on their Artemis Strategic Bond and Artemis Target Return Bond holdings, they remain big fans of the Nomura mandate through the leaner years.
“We know that Dicky is going to ‘take bets’,” said James Crocker, Albert E Sharp’s head of MPS.
“He's also going to hedge himself so you need to be careful about how you sell or explain Dicky's fund to other people, because you can very easily end up thinking that he's a bit of a gambler, that he's a bit of a punter, but that's not strictly true.
“He does take quite contrarian views at times, which you've certainly paid off for him in the past. And he's been stung lots of times, but he does hedge himself a fair bit as well.”
