What To Ask Yourself Before Buying A Strategic Bond Fund.



Posted on: 25th November 2014

It’s seen as a must-have investment by many. A flexible product that allows investors to gain access to a diversified portfolio of bonds managed by a specialist investor. And more than £8 billion was invested in these funds last year.

It’s true that investors are losing confidence in their ability to pick the right bond markets. But it’s not easy picking strategic bond offerings either. Why? Because there are a variety of approaches to things such as market maturity, interest-rate risk and derivative use.

The amount of risks and rewards are different for each person. If you are younger, you may be prepared to take more risks, however, someone older may want something more stable.

Is Strategic Bond right for you? These questions should help you find out.

What do you want from a strategic fund?

This is the ultimate question. Is this a pro-active investment move because you have a fixed portfolio. Are you happy with volatility levels? If so then you probably want more strategic bond funds. But you might just want to diversify and aren’t concerned about getting a big boost. If that’s the case then you may just want a milder mannered offering.

What is your existing bond exposure?

If you already have a mixed portfolio then you may be doubling up on risks rather than diversifying. You need to see what risks are increased or diluted.

Do you understand the strategy and what it means?

Once you’ve homed in on what subtype of strategic bond fund you’d like to investigate further, the next step is to make sure you fully understand the strategy and its implications for your portfolio’s risk/reward profile. Things such as Credit Exposure, Market Maturity and Derivatives.

Some older strategic bonds funds place a lot of their portfolios in junk bonds. Others will vary credit across the range. And while some funds will have flexibility to adjust the interest rate exposure of the portfolio to protect or profit from changes in short and long term interest rates, others will be tighter and have a more predictable outcome. These won’t make the most of certain opportunities.

Then there is the use of derivatives, which can offer the chance to protect capital. But they also reduce the transparency of the investment process and make it harder to predict the impact of market events.

How much do you want to invest?

Well, that depends on what’s really happening in the fund and you need to have asked those questions. As a rule, try to keep things modest if it’s an aggressive fund. Think about keeping investment low near retirement so that things aren’t as volatile. And maybe more if it’s a mild-mannered, strategic bond fund that is well diversified and able to adapt to changing market conditions.

For financial advice on strategic bonds, call our friendly team now on 0161 495 9340 or email us on enquiry@havenifa.co.uk.