According to FE Analytics, the IA Sterling Strategic Bond sector returned almost 30 per cent over a five-year period to 3 March.
The largest group of survey respondents (nearly 37 per cent) said strategic bonds were an important part of their clients’ portfolio and they intend to make more use of them this year, while only 17 per cent said otherwise.
However, more than a quarter (over 26 per cent) neither agreed nor disagreed with the sentiment.
Jason Hollands, managing director of London-based Bestinvest, said: “Strategic bond funds have increased in popularity over the past decade. They can be good solutions providing that the fund managers of such strategies get their calls right.
“Rather than an adviser making the call on whether their clients should have exposure to investment-grade bonds and government bonds for example, strategic bond funds enable advisers to completely offload this responsibility to the fund manager.”
He added: “One thing advisers should keep in mind is some of these strategies operate solely on a total return basis, which may be fine for some clients, but not those who invest in bonds for an income.
Almost 65 per cent of survey respondents said bond funds attribute to between zero and 25 per cent on their clients’ income, on average, while a third cited between 26 per cent and 50 per cent. Only four survey participants said bonds attributed to between 51 per cent and 75 per cent.
What is more, nearly 70 per cent of advisers sampled cited the need to diversify from equity in general portfolio construction as one of the reasons behind their investment recommendations into a bond fund.
However, the usual inverse relationships between bonds and stocks have reversed and are trading in greater synchronicity at present, according to Mr Hollands.
Programmes of quantitative easing in tandem with the persistence of a low interest rate environment have distorted bond and equity prices, resulting in greater correlation between the two assets, he said.
He added: “People typically invest in bonds for one of two reasons. Investors have historically flocked to bonds for income purposes, but bonds are not yielding as much as they have done so in the past. Secondly, bonds have historically been a solution for risk-averse investors.
“Investment in the Alternative Investment Market is not an adequate replacement for bonds because investments in the market tends to be highly illiquid and of significant risk. Whereas absolute return investments meet the income and the risk requirements.”
Absolute returns funds use strategies generally associated with hedge funds to meet investment objectives.
Such products have proved popular if Investment Association figures – to the end last year – are anything to go by. The IA Targeted Absolute Return sector was the best retail seller of 2016, pulling in £5.1bn. Fixed income was the second best selling with net retail sales of £3.8bn, after an outflow of £2.1bn in 2015.
