Dominic Cooke 18 March 2019
It’s 10 years since we launched the HL Multi-Manager Strategic Bond fund. Looking back, launching in February 2009 was as close to perfect timing as it gets. But it couldn’t have felt more different at the time.
Our own Investment Times, which landed on clients’ doorsteps in March 2009, was titled “Investing in uncertain times”. As it happened, March marked the end of the stock market’s fall but by that stage the global financial crisis had wiped over 40% off the value of the UK’s FTSE 100.
It was hard to believe the market would more than double your money over the next 10 years, but it has. Which proves, in lots of ways, why bonds can be important to a portfolio.
That might sound an odd thing to say but the timing of the fund’s launch on 2 February 2009 was 29 days before the market hit rock bottom. Say you were brave enough to invest in the stock market then, over the next month you’d have seen your investment fall 14%. You might have sold and walked away at that point. The financial system looked broken.
Stability amidst the storm
By contrast, over those 29 days, the HL Multi-Manager Strategic Bond fund lost only 1.23%. It represented some stability amidst the storm, which might have given you more confidence to stay invested in shares, when all around you were getting out.
That’s what our bond fund is for. Stock markets make an excellent home for long-term investments but they’re not always a comfortable, welcoming home. In the short term, they can feel inhospitable because they’re unpredictable and inefficient. Remember all investments can go down as well as up in value. While we think bonds can offer some shelter, there’s still a chance you could get back less than you invest.
Wealth can be created in the long run, benefitting from the effects of compounding. But you can only capture these benefits if you’re able to hold your nerve in the short run, and stay invested. So much of investing isn’t what you know, but how you behave.
That’s where bonds come in. Think of them like fenders on a boat. They can give you confidence when things get tight and you want some shelter, but they can take a back seat when you’re out on the open water. Importantly, they’re always on your boat when you need them.
10 years on
With that in mind, how has our bond solution done since its maiden voyage in 2009?
The HL Multi-Manager Strategic Bond fund has delivered a total return of 85.4%, which works out as just over 6.3% per year, on average. The strongest returns came in the early years – as we emerged from the global financial crisis. Compared to its benchmark, the IA Strategic Bond sector, it’s underperformed by 2.4% over ten years. Past performance isn’t a guide to future returns.
Our underperformance has stemmed from the way we’ve positioned the fund in recent years. Since the financial crisis bond yields have reduced, both on UK government bonds and well-regarded corporate bonds. As this has happened, we’ve moved the fund to a more conservative stance.
Yields hit all-time lows in 2016 and have risen a little since, but compared with history, they’re still relatively low. At these levels, we think they present a source of uneven risk – i.e. if all goes well, bond investors can receive modest income and perhaps a small capital gain but if things don’t turn out as predicted, double-digit capital losses are easily foreseeable.
We’re not willing to expose our clients’ money to this risk, so in the current environment we want to run the portfolio defensively. A more reserved stance does limit the fund’s potential returns in the short-term but, importantly, it can reduce risk of loss and help to offset stock market investments within a portfolio.
We’re pleased to say the fund has a good record here. Since launch, the most our fund has lost (peak to trough) is 5.30% - only one other fund in its sector has fallen by less. The FTSE 100 has seen a fall of over 20%.
Going forward, we’ve positioned it to have less risk of significant losses if interest rates rise. All else equal, if we see a 0.25% increase in interest rates the corporate bond index would lose 1.9% of its value, while the HL Multi-Manager Strategic Bond fund would lose only 1.1%.
And the fund’s been one of the least volatile of its peers over the 10 years since launch, lower than some 90% of its competition.
Remember this isn't a reliable guide to future performance, and nothing's guaranteed.
Putting volatility, which lots of investors associate with risk, and return together we can calculate how much return clients have received for the level of risk the fund has exposed them to. Again, our fund comes out favourably, ahead of more than 70% of its peers. We think these benefits of our active management more than justify the additional charges associated with a Multi-Manager approach.
With hindsight, we’d like to have delivered a stronger total return but we won’t sacrifice our focus on risk in search of return. We aim for the fund to be a cornerstone of our clients’ portfolios, which gives them more confidence to stick with their long-term investment plan.
As Warren Buffett said, “it’s madness to risk losing what you need in pursuing what you simply desire”. So until we see better opportunities, we’ll keep our defensive stance; holding a bias towards ‘strategic bond’ funds where the managers have more flexibility to protect the portfolio against losses or take advantage of attractive yields when they see them.
The HL Multi-Manager Funds are managed by our sister company, HL Fund Managers ltd.
The fund invests in high yield bonds, which carry a greater risk of default than investment grade corporate bonds. Economic conditions will have a greater effect on the price.
|Feb 2014 - Feb 2015||Feb 2015 - Feb 2016||Feb 2016 - Feb 2017||Feb 2017 - Feb 2018||Feb 2018 - Feb 2019|
|HL Multi-Manager Strategic Bond||5.4%||-3.2%||9.5%||2.5%||0.5%|
|IA Strategic Bond Index||6.5%||-3.3%||9.8%||2.4%||0.8%|
Past performance is not a guide to future returns. Source: Lipper IM, correct as at 28/2/19.
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This article is not advice. If you are unsure of the suitability of an investment for your circumstances, please seek advice.