Henderson Strategic Bond Fund A Income Units

How and when the euro zone crisis will end is a topic of much debate. John Pattullo co-manager of the Henderson Strategic Bond Fund, believes we are getting closer to the end-game. He suggests that ultimately the European Central Bank (ECB) will have little choice but to buy huge amounts of government bonds from the peripheral nations to prevent the crisis spreading.

Against this backdrop Mr Pattullo is adopting a cautious stance. Presently, around 20% of the portfolio is held in cash and while he will continue to look for opportunities he expects cash to remain between 5-10% of the portfolio for the medium term. The fund also has almost 14% of the portfolio in government bonds, including those issued by the UK and US governments, which could provide some shelter from further volatility.

John Pattullo admits the fund struggled during the summer months. He underestimated the extent to which banks would need to repair their balance sheets. Holdings in bonds issued by banks have now been cut from around 29% to 9% of the portfolio, including cutting all exposure to French and Spanish banks during the spring. Holdings in insurance company bonds, which currently account for around 15% of the portfolio, also performed poorly. John Pattullo believes insurance companies are in good shape, but investors failed to distinguish them from banks during the recent volatility.

Elsewhere, Mr Pattullo is more positive on higher risk high yield bonds and has approximately 40% of the fund invested in this area. The market consensus is currently suggesting 45% of high yield issuers will default in the next five years. Defaults on such a scale would be unprecedented and John Pattullo views this as far too pessimistic a scenario. Within the high yield universe he is focusing on less economically sensitive businesses such as cable TV companies. Companies like this have recurring revenue and don't necessarily need to keep growing subscriber numbers in order to generate the cash flow needed to service their debts.

The outcome for the global economy is difficult to predict. One of the advantages of strategic bond funds such as this is their ability to invest across the entire bond market with the aim of adding value in all market conditions. To do so the fund can invest in derivatives which is a higher risk strategy. This fund currently yields 6.6% (variable and not guaranteed), which looks attractive in an environment of low interest rates. However, please remember unlike cash which is guaranteed, the value of any investment can fall as well as rise. The fund can also take charges from capital which reduces the potential for capital growth. This fund currently remains on the Wealth 150 list of our favourite funds in each sector.