The Jupiter Dynamic Bond Fund is a so-called unconstrained bond fund with a, as its manager Ariel Bezalel puts it, go anywhere strategy. This means the fund can invest in a broad range of fixed income instruments, from European government bonds to emerging market debt.
In practice Bezalel has lived up to his motto, without being too capricious in his allocation, says Dirkx. “The fund positions itself actively, investing in long and short sovereign bonds, high yield, investment grade as well as cash and credit default swaps. But at the same time, the manager takes a strategic allocation approach and substantiates the changes he makes to the portfolio well.”
Dirkx also likes the active duration management of the fund. According to the fund’s factsheet, the average term-to-maturity of the bonds in the portfolio is slightly over 12 years. This would make the fund potentially vulnerable to interest rate volatility. “However, most of the duration exposure comes from Australian government bonds [five of the largest six positions in the fund are in long-duration Australian government bonds],” says Dirkx. Since the Australian central bank is currently in a monetary easing cycle, taking on duration is not as risky in this part of the portfolio.
The fund’s allocation of just 0.1% to cash is also testimony of Bezalel’s confidence he can withstand a Fed rate hike, in sharp contrast to many of his competitors who have large allocations to cash. JP Morgan AM’s Bill Eigen, the manager of the JP Morgan Strategic Income Opportunities Fund, for example has a cash weighting as high as 40%.
Unconstrained bond funds are sprouting like mushrooms at the moment: pretty much every big fund house has launched one or more unconstrained bond funds in the past two years. The Jupiter Dynamic Bond Fund was a trendsetter and has a SICAV track record of more than 3 years now.
The Jupiter Dynamic Bond Fund has the biggest single active fund weighting in the multi-asset fund Dirkx co-manages at BHF-BANK. “We have allocated 4% of our portfolio [about 20% of his total allocation to fixed income] to this strategy, even though we generally prefer to manage the exposure to the various fixed income segments ourselves,” Dirkx explains. “Though we are also aware we are exposed to star manager risk by investing in this fund, we are confident with the returns and the way the manager communicates his investment decisions.”
One of the reasons Dirkx decided to invest in the fund is the accessibility of the manager. “We had a couple of personal meetings with fund manager Ariel Bezalel to speak about his investment style and his market outlook. With bigger fund companies you usually only get to meet client portfolio managers.”
Since Dirkx included the fund in his portfolio in April 2014, it has delivered a slightly lower return than the average global fixed income fund (see chart), but it has shown much stronger downside protection than other bond funds. It lost only 0.50% during the past 6 months, while the average return for global fixed income funds was -2.91% over that period.
Though the investment style of so-called unconstrained bond funds might be better suited to navigate the current, challenging environment for bond investors than traditional bond funds, but a thorough due diligence is necessary to find out whether an active bond manager is worth his fees in this low yield environment. After all, Dirkx has good reasons he has been allocating so little to fixed income this year.
Click here for the latest fact sheet of the Jupiter Dynamic Bond Fund.