L&G Strategic Bond I Acc

The flexible, actively managed process means the fund’s portfolio can vary considerably based on different market conditions, meaning it is not dependent on a specific market environment to perform well. Likewise there is no ‘kryptonite’ environment for this approach either, where it is likely to struggle, but the fund tends to have a bias towards corporate bonds, meaning it could be exposed in an economic slowdown should company earnings struggle and the cost of borrowing go up (making older borrowing on lower rates comparatively less attractive)., The fund’s strong focus on big picture economic indicators should in theory identify this potential scenario ahead of time, however, and affect allocations accordingly.

The managers’ goal is to generate steady, repeatable returns, using their big picture economic understanding to enable the fund to respond well to prevailing market conditions, and as such, provide a fund that can perform in all seasons. Whilst not a prescriptive goal, the aim is to generate returns of between 5% to 6% total return per annum, over the medium to long term. Total returns are made up of income and capital growth, the tilt toward each depending on the fund’s positioning in response to market conditions and the opportunities the managers have identified.

The primary performance goal though is to minimize the impact of negative periods of performance. By performing better in falling markets, the managers aim to be one of the best performers over the long term. That said, the fund’s ‘beta ratio’, a measure of sensitivity relative to the market which can help to show how risky a fund is, can range from 0.7 to 1.3 meaning there can be times where the fund will outperform in rising markets also. This return profile can be seen in the calendar year returns below, where the trust has outperformed peers in every year of the past five, bar one, most notably in 2022 when the peer group pulled back significantly and the fund held up relatively well.

The L&G Dynamic Fund portfolio is constructed using a team-based approach, enabling the three managers, Colin Reedie, Matthew Rees and Enda Mulry, to capitalise on the wide resources of global L&G network, where they share ideas and insights. The process begins by building a risk framework, which helps define the portfolio’s structure and involves an overview of major economic factors, such as interest rates and geopolitical factors, and involves considerable use of data. This provides the managers an indication of how much risk they should look to take in the fund over different time periods.

Once they have the framework, the managers can then add in a mixture of different ideas. Much of the work here is done at ground level, examining individual bonds on their own merits and looking at the industries within which the companies issuing them are situated, to provide a context upon which to make a judgement. The managers are free-range in their approach to ‘where’ they will invest, going after more defensive areas like government and corporate debt, as well as areas that offer higher yields such as developing economies, although the portfolio will be predominantly exposed to bonds denominated in UK sterling. Having multiple currencies in a portfolio adds another level of unpredictability to returns, so a simpler approach is in our view a good one. The managers can also use financial products called derivatives which help them to manage risk and smooth returns.

The fund is actively managed and the portfolio can range from a more defensive profile, offering protection from risk, to more aggressive positioning to deliver upside when the managers feel the time is right. This means the trust’s income and growth potential can also vary.

As a result of the large opportunity set they offer, and the ability to deliver outperformance through superior stock selection, the managers have tended to have a bias towards corporate bonds, as can be seen in the chart below, although the breadth of portfolio can be seen in the wide variety of sectors.

• Bias to corporate bonds – issued by companies not governments – could contribute to underperformance in economic downturns or periods of high interest rates
• Predicting future macroeconomic environments is notoriously difficult, and could lead to unfavourable positioning if the wrong calls are made
• Income can vary as portfolio allocations change