Basic portfolio planning suggests that some form of fixed interest holding is a fundamental part of any diversified investment portfolio. The simple rhetoric for this being that the performance (of the majority) of fixed interest assets often work in the opposite direction to equity assets, therefore providing a cushion during stock market declines, thus helping to lower overall portfolio volatility.
The fixed interest element of many portfolios is most commonly a bond fund, although there are many to choose from and the success of the different types of assets that they hold can have dramatic effects on the returns of the fund. For example, some bond funds will specialise in purchasing government debt, others in mortgage loans, corporate debt, and more popular recently; emerging market debt.
The popularity of Total Return Bonds (sometimes referred to as 'Strategic Bonds') is a reflection of the current paltry bank interest rates, forcing investors to take a fresh look at bond funds as they hunt for a better return without having to purchase equity related funds. The UK's Investment Management Association (IMA) Strategic Bond sector recorded strong interest from retail investors in January, with GBP284m in net sales, a monthly record, making it the second most popular asset class for the month.
Unlike traditional bond funds, the remit of a Total Return Bond fund allows it to hold different types of fixed interest assets, on a global scale, thus further diversifying the investor's portfolio. Thus, a typical Total Return Bond will hold varying proportions of the asset classes mentioned above, depending on the manager's conviction at the time. This makes managers of such funds ideally equipped to counter the effects of fluctuating inflation and bank interest rates.
In addition to holding the correct types of assets at the right time, other key considerations affecting the performance of a Total Return Bond funds are 'credit quality' and 'maturity term'.
The credit quality of a bond held within a Total Return Bond fund is as important and topical now as ever before. Some of the world's largest companies have succumbed to financial difficulties over recent years and the corporate debt that they owed, in some cases, was never re-paid. Therefore, a more conservative option for investors is to carefully choose a fund that holds corporate debt of a minimum, higher quality, such debt is rated by independent third parties such as Standard & Poor's.
Bonds are held for a set amount of time, with an amount promised to be paid to the holder (i.e. the fund manager) at maturity. Continued global economic uncertainty means that the further away the maturity date of a bond, the greater level of uncertainty is attached to the bond. It is no coincidence, therefore, that trends point to many fund managers purchasing shorter-term bonds in a bid to reduce the likelihood of defaults. Conversely, some fund managers will hold longer-term bonds owing to the attractive yields they offer, in a bid to attract purchasers.
Taking all of the above into account, management of Total Return Bonds is considered an extremely specialist discipline. One of the most widely regarded managers in the industry is Allianz PIMCO's Bill Gross, manager of the Allianz PIMCO Total Return fund - the largest mutual fund in the world.
