IN TIMES of stock market turbulence, the inclusion of fixed-interest investments should act as a stabilising component of an investment portfolio. However, with so many different types of fixed-interest securities available, the main challenge is to decide which end of the credit quality spectrum to be in.
The £280 million Artemis Strategic Bond fund aims to provide total returns by investing in a range of fixed-interest securities from the safest institutions (rated "AAA") to the more speculative. The "strategic" approach allows the managers free rein
to position the fund appropriately, depending on the economic outlook.
Co-manager Alex Ralph explained: "At launch three years ago the fund was around 70 per cent invested in high-yield bonds, but this is now below 40 per cent due to our concerns about default rates increasing and the fact that investment-grade valuations were incredibly attractive."
The financial theme is strong in the fund at the moment with an overweight position compared to the sector weighting. In terms of individual holdings, the troubled banking sector provided a good example of the attractive valuations available, according to Ralph. "With spreads (the difference between the yield on government and corporate debt] at historic highs and banks de-leveraging to shore up their balance sheets, this hurts the equities but supports the bonds. We bought in to HBOS four-year paper at a yield of 9 per cent."
The fund can also hold overseas bonds and in fact has a reasonably sizeable exposure to German government bonds. "All our overseas holdings are hedged back to sterling as we don't want the associated volatility that the currency positions would bring. It's notoriously difficult to get those calls right anyway," explained Ralph.
Although the fund managers have free rein to invest anywhere, there are internal controls to avoid over-exposure to any specific holding, with a maximum of 5 per cent for any investment-grade bond and 3 per cent for any high-yield bond.
Looking ahead, the main decision to be made by the managers over the next 12 months will be when to go back in to high-yield, according to Ralph. "This could be in mid 2009, as we could be emerging from recession or slowdown, whichever it turns out to be. High-yield is always the first to react, even before equities, so capturing this upside will be crucial."
The fund, structured as a unit trust, has an initial charge of 5.25 per cent and an annual management charge of 1 per cent. For more information call Artemis on 0800 092 2051 or www.artemisonline.co.uk
• Barry O'Neill is a chartered financial planner with Thomson Shepherd Limited (incorporating Coggans Wood).
The full article contains 459 words and appears in The Scotsman newspaper.
