However, the Targeted Absolute Return sector has generated somewhat unimpressive lowly returns in recent history. It returned 3.4 per cent over a year to 3 March this year.
Paul Gibson, managing director at Aberdeenshire-based Granite Financial Planning, said: “I have never recommended an absolute return strategy. I have always found them too complex and difficult to explain to my clients. I am not convinced that funds can deliver targeted returns regardless of the investment environment and the returned generated by some of these funds has reinforced my belief.”
The track record of a fund manager and the appetite for a cautious investment in volatile times were the second and third most popular reasons for investment recommendation into bond funds – attracting nearly 45 per cent and 42 per cent of the vote respectively.
Interestingly, about 38 per cent of respondents highlighted inflation as a contributing factor – despite its impact on interest rates and, not least, real or inflation-adjusted returns.
The future direction of interest rates and inflation was deemed by respondents as the second most important factor for deciding a client's allocation to bond funds – ahead of the age of the client (nearly 12 per cent) and changes in central bank policies (more than 3 per cent).
Darius McDermott, managing director of London-based Chelsea Financial Services, said: “If inflation continues to creep up, it might lead to more than two rate rises or a substantial increase of 0.5 per cent when rate rises occur. At this point fixed income assets would be heavily sold off.
“If you holding a higher yielding asset, you should be recompense for taking on that risk. We are underweight in fixed income because of inflation and interest rate risk, but where we have exposure to fixed income, they have a decent yield attached to it to make it worth our while.”
The most important factor when it comes to clients’ allocations to bond funds, according to nearly 43 per cent of the sample, is other assets.
Mr Gibson said: “Investment recommendations should be driven by clients’ financial plans. We would look at the return a client requires and have a look at the different asset classes for a number of invests with the potential to generate the target return and adheres to the client’s attitude to risk.”
Myron Jobson is a features writer of Financial Adviser
Key points
- Global markets have factored in the potential of numerous interest rate rises.
- Turbulent outlook for bonds has not dissuaded intermediaries from recommending them to clients.
- Strategic bond funds and Absolute Return strategies are touted as a good investment replacement for conventional bonds.
