Jupiter Strategic Bond – October 2021 update

• Ariel Bezalel is a talented manager who has decades of experience of investing in bond markets
• The fund has performed well over the long term, delivering good returns to patient investors
• We think there’s an attractive culture at Jupiter which gives managers autonomy to invest how they see fit
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The managers aim to generate a combination of income and capital growth in excess of the Strategic Bond sector average over the long term. The fund could add some diversification to a portfolio focused on shares or higher risk bond funds. We expect the fund to deliver stronger relative performance in falling markets.

Manager

The fund is co-managed by Harry Richards and Head of Fixed Income at Jupiter, Ariel Bezalel. We think Bezalel is a talented and experienced bond manager whose economic analysis and ability to select successful bonds within certain sectors has added value for investors. He became manager of the fund in June 2008 and has now worked at Jupiter for the last 24 years. Bezalel was joined on the fund by co-manager Harry Richards in April 2016. Richards now has 10 years of investment experience having joined Jupiter in 2011. The managers also have other fixed income responsibilities but we think they have the support and resources to do a good job for investors.

Process

Bezalel and Richards analyse the state of the economy and use this to help decide where to invest. This involves taking a view on which direction interest rates will move in developed markets to build up a picture of how the economy will develop. Although the managers can invest in bonds from around the world, at least 70% of the fund must be invested in bonds that are bought and sold in British pounds or hedged back to Sterling. They can also use derivatives which if used increases risk.

Bezalel and Richards are willing to take more risks when they’re positive on markets. So, at times they will invest in higher-risk areas like emerging markets and high-yield bonds. But when the outlook is more uncertain, they can adopt a more defensive approach and might invest more in government or higher quality corporate bonds in an effort to help shelter the portfolio from large drops in value.

In recent years the fund’s investments in high yield bonds have been steadily increasing and now account for around 52% of the fund. This has largely been at the expense of developed market government debt which has been reducing. Aside from government debt, in terms of sector exposure, financials, telecoms and consumer staples have the largest weightings within the fund. Together they account for 38%.

The fund’s duration currently stands at 5.9 years. Duration estimates the sensitivity of a bond fund to changes in interest rates and is measured in years. The longer a bond’s duration, the more sensitive it is to interest rate movements. Bezalel feels the current positioning is a good hedge for the fund’s allocation to corporate bonds.

Bezalel is mindful of a number of risks including that of slowing global growth causing stagflation. Stagflation occurs when economic growth slows, unemployment increases, and inflation remains high. He thinks the higher inflation we’re currently seeing is largely a result of severe disruptions to the global supply chain from the pandemic, but that it’ll ultimately prove to be transitory. This means stagflation could present a short-term concern for investors while inflation remains high but shouldn’t be a concern in the longer term. This is in part due to powerful long-term factors, like record levels of government debt, ageing populations and globalisation, which Bezalel thinks will continue to act as deflationary forces.

Culture

We think the culture at Jupiter is attractive. Fund managers are given autonomy to invest the way they see fit, but with an appropriate level of challenge from others in the business.

Fund managers at Jupiter are incentivised in line with the performance of their funds over various timeframes. We think this aligns their interests with those of investors and helps the managers to focus on delivering strong performance for clients.

Jupiter is also placing increasing importance on environmental, social and governance (ESG) issues, and has a governance & sustainability team that helps fund managers engage with companies and vote on ESG matters.

Cost

The fund has an annual ongoing fund charge of 0.73%, but through Hargreaves Lansdown you can secure an ongoing saving of 0.19%. This means you’ll pay an ongoing charge of 0.54%. Part of this reduction is paid as a loyalty bonus, which could be taxable if held outside of an ISA or SIPP wrapper. The HL platform fee of up to 0.45% a year also applies.

Performance

The fund's flexible approach has meant that over the long term it has tended to outperform its peer group. The fund has performed particularly well during falling markets, sheltering its value better than others in the sector, but has marginally outperformed in rising markets too. In total since launch, the fund has delivered a return of 146.2%* to patient investors, compared with a return of 106.1% for the IA £ Strategic Bond peer group. The flexibility afforded to Bezalel means the fund could perform differently to some others, but we back Bezalel’s skill and experience to reward investors over a longer time horizon. Past performance is not a guide to the future.

Over the past year to 30 September the fund hasn’t managed to keep up with the sector’s peer group average return of 5%, lagging by 1.8%. The fund’s investments in high yield bonds, investment grade corporate bonds and emerging market bonds have all contributed to performance over the year. However, Bezalel’s investments in developed market government debt, especially Australian, has detracted from performance.

While there are no guarantees how the fund will perform in future, we think the prospects are good with Bezalel at the helm. We think he’s a talented manager with plenty of experience in a sector where experience counts.

Annual percentage growth

Past performance isn't a guide to the future. Source: *Lipper IM to 30/09/2021.

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