Rathbones takes on fixed income sector with Strategic Bond launch

Rathbones Strategic Bond plans to split assets between direct investments and underlying managers.

Rathbones is making a renewed push into the fixed income space with its Strategic Bond fund, but buyers have questioned how it will make its mark in a crowded sector.

The group’s Strategic Bond fund will have an unusual structure, with assets split between direct investment and underlying managers, targeting a lower volatility level than its peers.

The fund will have a strategic bond fund allocation overlay, with management split 50/50 between lead manager Bryn Jones and David Coombs, the head of multi-asset management.

Jones, who runs the £74m Rathbone Ethical Bond fund, will invest half of the fund in investment grade bonds, index-linked bonds and gilts, his key areas of expertise.

Coombs will oversee the other half of the fund, cherry-picking bond managers that specialise in a range of alternative fixed income stocks, through collective investment vehicles.

“While a number of other strategic bond funds have come to the market in recent years, we are differentiated by our ability to invest directly in fixed income securities and in collective vehicles, harnessing the considerable experience across Rathbones,” said Jones.

“It is impossible to go out and find one manager who is great at everything. Through this fund we can go out and identify the best managers.”

But whether Rathbones will be able to compete with other heavyweights in the sector, such as M&G’s Richard Woolnough, Fidelity’s Ian Spreadbury, and Ariel Bezalel at Jupiter, remains to be seen, fund buyer say.

“This is a highly popular space with highly talented managers,” said Hargreaves Lansdown’s Ben Yearsley.

“It might be hard for them to gain traction and struggle to build up money under management.”

Ben Willis, the head of research at Whitechurch Securities, raised concerns the fund might struggle without a big name behind it.

“Strategic Bond is basically the UK Equity Income sector of the bond world. It is a highly contested sector and I would see it as hard to make a splash in the IFA world without a big name,” he said.

Coombs countered by saying Rathbones is not trying to compete with the star names in the peer group.

“We have a broader remit and can invest in products other strategic bond managers cannot, such as hedge funds. We have extra tools, because we are aiming at a much lower volatility target than our peers,” he said.

“A lot of strategic bond funds are ratcheting up risk to maintain yields, while many absolute return bond funds have risk budgets so low they have not generated any returns at all.

“We are positioning ourselves as somewhere in the middle,” added Coombs.
The portfolio is launching with £10m of seed capital, the group believes it could attract assets of over £1bn. Rathbones expects to see particular demand from SIPPs, where regulatory change has pushed pension investors towards fixed income.

The fund’s total expense ratio is 2.4%, which is fairly high compared to its peers, owing to the multi-manager element of the product.

Coombs has so far invested in Capital International Global High Income Opportunities, the Templeton Global Bond, the Loomis Sayles Multi-Sector Income, and Investec’s Emerging Market Local Currency Debt fund.

The aim of the fund will be capital preservation, rather than chasing yield. The managers will target long-term total returns, with an estimated gross initial yield of 3.84%.