Investors' hunt for yield in fixed interest markets remains as strong as ever. Driven by central bank policy of lowering interest rates and instigating quantitative easing, government bond prices have risen in recent years, pushing their yields down to all-time lows. As such, many investors have looked to riskier areas of corporate bond markets in order to satisfy their income requirements.
In this environment, higher-risk high yield bonds have attracted significant demand. John Pattullo and Jenna Barnard, managers of the Henderson Strategic Bond are cautious of this increased demand, though they continue to believe some of the best returns can be generated from this area of the bond market. 43.4% of the portfolio is currently invested in high yield bonds and the fund currently yields 3.6% (variable and not guaranteed).
The managers also currently favour BBB-rated bonds, which fall at the lower end of the higher-quality investment grade bond spectrum. Around 30% of the fund is currently exposed to these bonds. The managers also have the flexibility to invest in derivatives which involves additional risk.
John Pattullo and Jenna Barnard's core strategy is to continue to focus on bonds issued by large companies within mature industries, which are less sensitive to fluctuations in the economic cycle. They are currently positive in their outlook for a number of telecoms businesses, including Numericable-SFR based in France. In particular, they like mobile operators who have successfully bundled broadband, landline, TV and mobile products in attractively priced packages, which help maintain a more stable customer base.
On the other hand, economically-sensitive industries such as retail, food and energy have tended to be avoided. The managers are not comfortable with the increased volatility they have seen in areas such as energy, impacted by the fall in oil prices.
Over the past year, some of the fund's best-performing holdings include banking and insurance bonds. Top performers include bonds issued by Nationwide, Lloyds and Prudential. The fund has also invested in bonds issued by Aviva and Friends Life - Aviva's takeover of Friends Life boosted the performance of these holdings last year.
Elsewhere, the managers last year initiated a position in a new bond issued by Siemens audiology, a global supplier of hearing aids. In their view, the company has a good share of the market and the support of a strong management team.
Our view on this fund
Over the last ten years, the fund has delivered an attractive total return of 88.5%*, with income reinvested, compared with 52.9% for the average fund in the sector. Although please remember past performance is not a guide to future returns.
|Annual percentage growth|
| Apr 10 -
| Apr 11 -
| Apr 12 -
| Apr 13 -
| Apr 14 -
|Henderson Strategic Bond||3.5%||0.9%||13.7%||6.1%||7.4%|
|IA £ Strategic Bond||4.0%||4.6%||9.9%||3.5%||6.7%|
Past performance is not a guide to future returns. Source: Lipper IM* to 01/04/2015
In our view, this fund is run by an experienced team of bond managers and therefore it has the potential to perform well over the long term. However, we currently favour other managers in the IA £ Strategic Bond sector that take a more flexible approach to bond investing and which we believe have built stronger track records over the long term. Therefore this fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors.
Please note the fund's charges can be taken from capital which can increase the yield but reduce the potential for capital growth.