This fund falls into the IMA Strategic Bond Peer Group. Generally speaking, these fixed income mandates provide the manager with much greater flexibility to allocate across the fixed income universe. The mandates also usually allow for the use of derivatives to assist in managing portfolio risk; this might be to insure the portfolio against the risk of rising interest rates or the risk of a rise in corporate bond defaults.

We expect these funds to tread the line between quality bond funds and high yield bond funds; adding value by astute asset allocation and credit selection.

The Henderson Strategic Bond fund was launched in 2006 and has been managed by John Pattullo and Jenna Barnard throughout. The managers’ current strategy is very much one of focusing on income generation at an acceptable level of risk. Their belief is that interest rates will remain lower for longer and against this backdrop, the search for yield will continue. In order to achieve this yield objective, the portfolio is invested predominantly in corporate bonds in the middle to low end of the rating spectrum (BBB, BB and B).

The managers accept that going forward, the market is likely to experience further bouts of instability; as a result, the positions they have built in this part of the market are conservative. Within BBB and BB rated securities, the portfolio focus is on bonds issued by large, established corporations; whilst in the lower rated B category, exposure is in more non-cyclical companies. They are also avoiding more illiquid/esoteric trades. The team have also been disciplined in building cash, once valuations start to appear stretched – portfolio cash levels going into October 2014 were in low/mid-teens. They have since started to deploy this cash with some bonds trading at lower prices. On top of the deliberate yield centric strategy, the application of charges to capital further enhances the yield available. The fund’s distribution yield on the 31st of October 2014 was 5.4 per cent, after charges and gross of tax.

Rob Harley is director of research at Tilney Bestinvest.

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