The market volatility created by the Covid-19 pandemic has provided a new testing ground for flexible bond funds.
The challenges so far have manifested in the form of a sell off in March of last year, in which the credit and equity markets plunged as investors rushed for liquidity.
More recently, investor fears of rising inflation following unprecedented monetary and fiscal stimulus led to a sharp decline in government bonds in the first quarter, wreaking havoc on the bond market.
The pandemic has once again highlighted the importance of flexibility to invest in different bond markets, with rapid movements challenging the idea that public debt can still be viewed as a safe haven.
The good news is that funds with the flexibility to switch from one type of corporate debt to government debt have weathered the crisis well.
Citywire’s Sterling Strategic Bond and Global Flexible sectors posted an average return of 12.8% and 12.6% respectively over the year at the end of March. This is slightly above their three-year average performance and indicates that many strategies have made a living.
Richard Carter, head of fixed interest rate research at Quilter Cheviot, said: “Strategic bond funds and flexible bond funds have generally performed well over the past year compared to d ‘other sectors, since these funds tend to have a shorter duration than traditional government bond or investment funds, therefore are less sensitive to interest rate risk. The narrowing of credit spreads over the past year has also supported most strategies. ‘
The potential for outperformance in various market environments helps explain the popularity of strategic bond funds in model portfolios. Shopping list data collected by Citywire shows that at least eight wealth management firms hold the £ 3.2 billion Allianz Strategic Bond fund in 14 portfolios (see table below), making it makes the most popular flexible strategy.