Advertised almost as the multi-asset option for fixed income, this is because funds in the IA Strategic Bond sector have the flexibility to invest across the entire bond spectrum from the safety of government bonds, to credit and high yield.

However despite rises in bond yields and interest rates over the last 12 months, the popularity of the IA Strategic Bond sector has nosedived in 2023, with the sector seeing net outflows of some £2.2bn over the year to October according to latest data from the Investment Association (IA).

So is this a case of investors preferring to do their own allocation, or are investors still wary of fixed income in general after the asset class posted a 23% loss in 2022?

Chris Metcalfe, chief investment officer at Iboss, said for several years up to the period when  most believed inflation was going to be transitory, it had a relatively small allocation to strategic bonds.

“Managers in this space have two primary sources of alpha: duration and credit quality,” he said. “The potential to add significant value by playing duration was minimal, but that all changed following Powell’s inflation epiphany at the end of 2021.”

Metcalfe added another cause of its reluctance to embrace active managers in the strategic bond space was that many feared getting too far away from their peer group. 

“Some appeared to take insufficient risk and remained longer duration than either they needed to or than proved advisable with the benefit of hindsight.,” he said.

As a result, Metcalfe said Iboss brought in more passive short-duration funds as it never subscribed to many central banks’ assertions about inflation being permanently conquered. 

“While prepared to make these moves, we prefer to leave much of the tactical heavy lifting to the active strategic bond managers,” he added. “It may be that other discretionary managers feel similarly let down by many of the active managers, hence the large amounts of withdrawals in 2023.”

As a result over the last few quarters, Metcalfe noted Iboss has been increasing its allocation to active strategic bond managers, with the latest addition being the M&G Optimal Income fund, managed by Richard Woolnough.

“Managers now have a complete toolkit to produce alpha as volatility in the bond markets remains high,” he said. 

“Even with the stellar returns from fixed income since Powell once again turned dovish at the end of October, we remain optimistic for this sector for 2024,” he added.  “We expect inflation to remerge at some point, but that is an issue for another day.

Following one of the worst markets for bond investors in over four decades, Darius McDermott, managing director of Chelsea Financial Services, said 2023 has seen a significant turnaround in fortunes for fixed income. 

“The outlook for fixed income is expected to continue on this positive trajectory in 2024 as the market consensus is that interest rates have peaked and inflation will moderate, creating a favourable environment for bond investors,” he said.

While noting those investors in search of a “one-stop shop” for their fixed income allocation may prefer to use a strategic bond fund, he added the managers utilising this flexibility can take strikingly distinct approaches. 

“Two funds we like within the sector are the Baillie Gifford Strategic Bond and Nomura Global Dynamic Bond funds, both of which take contrasting strategies,” McDermott said.

For example he said the Baillie Gifford Strategic Bond fund aims to produce a monthly income from a concentrated portfolio of mainly UK fixed income securities. 

“Stock picking is the primary focus of the fund’s managers, Torcail Stewart and Lesley Dunn, and this helps set them apart from many of their peers,” he said. “They look to take advantage of inefficiencies at the stock level and believe that detailed research can enable them to deliver consistent outperformance.”

McDermott said he likes this approach because trying to forecast interest rate movements and second guess central bankers is “notoriously difficult”.

He added the Nomura Global Dynamic Bond fund, on the other hand, takes an unconstrained, global approach to its pursuit of total returns. 

“Manager Richard ‘Dickie’ Hodges assesses the global economy to identify attractive sectors and themes and then uses fundamental analysis to find the best ideas,” McDermott said. “He also invests across the entire bond range, including government and corporate bonds, as well as emerging market products and inflation-linked assets.”

The end result for McDermott is that investors seeking nuanced and diversified exposure to fixed income may find strategic bond funds valuable. 

“However, the sector’s diversity in styles and approaches requires careful selection to align with individual investment preferences and risk tolerance.”

]]> https://international-adviser.com/iboss-renames-income-mps/ Thu, 02 Nov 2023 11:13:45 +0000 https://international-adviser.com/?p=44621 IBOSS has changed the name of its Income MPS to Decumulation MPS in an effort to direct the range towards clients at the retirement stage.

The transition is a result of a Financial Conduct Authority (FCA) review of retirement income advice that began in 2023 which the regulator aims to publish by Q4.

This led IBOSS to begin speaking with advisers about their ‘at retirement’ stage clients to understand how they saw this area of the market within their own business, specifically what investment vehicles advisers were considering.

The firm concluded that its existing ‘Income’ portfolio range fit well with the desires of clients in the retirement stage and decided to rename the range in an effort to address the client demographic it was suited to.

To read more on this topic, visit: IBOSS cuts charges across 32 MPS portfolios

IBOSS chief investment officer Chris Metcalfe said: “In our opinion, and for the foreseeable future, no AI will be able to replicate the crucial ongoing discussions between the adviser and their clients, and this will remain a complex investment area that their professional know-how, soft skills, and expertise will remain imperative.

“We are confident that our Decumulation MPS can help support the adviser and planner community within this space as it focuses on what we class as defensive characteristics, enabling clients to take the level of income they require for their own personal circumstances. We also have over 15 years’ experience of managing an income portfolio, allowing us to demonstrate a very strong track record.”

In August this year the firm cut ongoing charges across its DFM MPS portfolios.

The IBOSS Decumulation MPS is currently available across 15 platforms.

This article first appeared on our sister site Portfolio Adviser

Having been the worst seller in net retail terms in both 2019 and 2020, year-to-date the beleaguered peer group has witnessed net outflows of some £1.73bn.

In July it was also announced that Abrdn was calling time on its Global Absolute Return Strategies (Gars) fund, a bellwether fund for the peer group which, at its peak, hit £27bn. However after years of underperformance assets fell to just £856m and, as a result, it is set to be merged into the group’s Diversified Assets suite of funds.

Designed to be all weather funds that can perform well irrespective of market conditions, are investors right to be avoiding the sector, or are there examples of funds doing what they say on the proverbial tin?

Ryan Hughes, investment director at AJ Bell Investments, said principally on the back of funds not being up to deliver on investor expectations, the sector has been a “mess” for a number of years.

“Too many funds have failed to live up to the marketing hype and therefore it’s little surprise to see the significant outflows over multiple years,” he said. “With returns on cash of around 5% now available to investors, there is a strong argument as to what is the point of using an absolute return fund at all.”

On top of this is the always contentious issue of fees which are typically very high in the sector, which Hughes said feels even more uncomfortable in the new Consumer Duty environment, while adding beating cash will likely prove to be a hurdle too high for most funds.

“We have never been big users of the sector, instead focusing on just a couple of funds that we felt had genuine skill and experience of running money with an absolute mindset that could potentially be uncorrelated rather than simply providing equity or bond beta in disguise,” he said.

More recently Hughes argued this has reduced to just one fund, the Tellworth UK Select fund, which follows a long/short equity approach and operates with net market exposure of close to zero.

“Manager John Warren has significant experience of managing this type of strategy and therefore understands how to manage the net and gross exposure which is crucial in this type of fund,” he said.

“Good funds are few and far between in the sector and in a world now focused on costs and performance expectations more than ever, I expect the sector to shrink back even further as investors focus on simple, low cost solutions that clients understand.”

Chris Metcalfe, chief investment officer at Iboss, said one of the reasons for using a TAR fund in the first instance is that it brings different ideas and strategies into the portfolios and can help reduce overall volatility.

“Many funds in this space can also use instruments we don’t have direct access to, such as put and call options,” he said. “One of our simple rules of thumb when it comes to assessing managers is whether they often achieve their investment goal most years.”

In the case of the Ruffer Diversified Return fund, which Iboss currently uses in the TAR space, Metcalfe said the answer is yes.

“The longer-term track record of the team is impressive, which is why we invested, but I think it is fair to say that, so far, 2023 has not been the year they would have hoped for,” he said.

“Their goal is to ‘achieve positive returns in all market conditions over any 12 months, after costs’, but we have seen over the years just how hard it is to constantly achieve these kinds of targets when the building blocks of the portfolio are risk assets in all their various forms.”

Despite the recent disappointment, Metcalfe noted the team have achieved their goal on the sister product, the Absolute Return fund, in nine out of the past 10 calendar years, and this has the same remit.

In addition to the Ruffer fund, Metcalfe said Iboss is bringing in the Ninety One Diversified Income fund for a similar reason, although the fund sits in the IA Mixed Investment 0-35% Shares sector.

“There is an inevitable blurring of the lines of our asset allocation when using cross-asset funds, but we feel the benefits outweigh any complications,” he said.

According to the latest Investment Association statistics, over the year to August 2023, investors ploughed some £1.18bn into short-term money market funds as sentiment for risk assets continued to deteriorate.

The peak of these inflows occurred in March and April when the IA Short Term Money Market grouping attracted net retail inflows of £769.8m and £666.6m respectively, placing the sector at the very top of the sales charts for those two months.

While demand has cooled slightly since, Iboss chief investment officer Chris Metcalfe said advisers were increasingly reporting that clients are querying the merits of investing in risk assets over cash.

“This unfavourable backdrop for investing in risk means clients have been holding off making new investments or topping up investments or withdrawing multi-asset funds and topping up cash,” he added.

While cash savings clearly offer some measure of security and are low-risk, Metcalfe warned they typically provide lower returns than “riskier” options such as equities and bonds, while interest rates may struggle to keep pace with inflation, potentially eroding the purchasing power of savings over time.

“We have always believed cash is an asset class in its own right and should always play a part in holistic financial planning – and, for most investors, be part of their multi-asset portfolio investment,” he continued. “That said, careful consideration must be given to both time frames and the relative attractiveness of cash versus other asset classes.”

Falling equity valuations

Metcalfe noted that, in 2021, money flowed into both cash and equities, even as valuations became more expensive on a weekly basis. “Since then, valuations have fallen in many world areas, but equity flows have reversed,” he said. “Although cash rates have markedly improved over that period, unless your investing philosophy is only, and forever, to hold cash, why is this not a good opportunity to buy the non-expensive parts of the equity market?”

After years of paying virtually nothing, Metcalfe said he was not surprised banks and building societies were now championing their savings rates – while he was also aware that when markets fall it is difficult for investors to put money into equities.

“The more significant the fall, however, the better the relative entry point,” he argued. “Both bonds and equities dropped sharply in 2022 and 2023 and, so far, we have seen only small gains in equities and further losses in bonds so, intuitively, cash looks like the best place to invest right now.”

Yet for Metcalfe, there is a reason why a saying like “don’t put all your eggs into one basket” is so well-known, and that is because, in his words “it is just common sense”. “Investing is no different to many other aspects of life,” he said. “No matter how compelling the narrative, putting all your assets in just one is very unlikely to be the right answer.”

The firm, which is part of the Kingswood Group, said ‘successful negotiations’ with multiple fund houses have resulted in reduced pricing on a range of the underlying funds.

The firm said several of the funds in questions are also held across its OEIC range.

Full details are yet to be confirmed, but IBOSS provided pricing for its Core MPS range as an example. It said the OCF on these will be as low as 0.34% in its low-risk portfolio, and its high-risk portfolio has dropped from 0.65% to 0.58%.

IBOSS expects costs to be reduced further in the fourth quarter once the full impact of the newly agreed terms is reflected.

Chris Metcalfe, chief investment officer at IBOSS, said: “In the world we are all currently living in, the cost of almost everything seems to be going up. We are therefore delighted to be able to offer advisers and their clients lower charges, and some of the very best in terms of competitive pricing across the DFM MPS marketplace.”

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