Strategic bond managers need to make better use of the tools and strategies available to them to improve their returns, according to discretionary fund manager (DFM) Wellian Investment Solutions.
These managers have the ability to significantly outperform their benchmarks but often fail due in part to their reluctance to employ the full range of different investment instruments available to them, the DFM says.
By looking at the IA Strategic Bond Sector and IA Global Sector as two sectors that have a broadly “unconstrained” remit and a very large investment universe, Wellian noticed a greater disparity in the equity space when looking at returns. These two sectors should provide a better chance for the fund manager to deliver a wider dispersion of returns from the average. Although these two sectors are not exactly comparing “like with like”, the DFM argues that when the investment universe and opportunity set is large, the scope for outperformance should be large too.
Richard Philbin, chief investment officer of Wellian Investment Solutions says: “It doesn’t make sense for these funds to continuously fall short of reaching their full potential; especially given that managers of strategic bonds have such a wide variety of tools available to them, such as the ability to actively manage the duration curve, the yield curve and the credit spectrum as well as to employ cash bonds and derivatives. Strategic bonds can be concentrated or broadly diverse in terms of numbers of issues or issuers. They are not necessarily expected to deliver a high or sustainable yield for instance and yet the difference between the best, average and worst funds over a 10-year time horizon is relatively narrow. During this time the opportunity set to deliver excess performance or underperformance would have been very large and yet it feels like they are not maximising the opportunity set.
“Global equity managers by comparison have managed to achieve notable returns whilst operating within a ‘tighter’ investment universe – the vast majority of managers either do or do not have an exposure to a stock and tend not to use as many derivatives in their investment philosophy. Perhaps bond managers are by nature more cautious and this is holding back their performance potential.”