Investors must tread more carefully than ever when allocating capital to the IA Sterling Strategic Bond sector, according to Rathbones' Alex Moore, who is upping quality across clients' portfolios.
The firm's head of collectives, who replaced Mona Shah in the role last year, favours strategic bond funds because of their flexibility, but echoed warnings the sector is a "catch all" and houses a wide range of varying risk mandates, particularly as markets enter "late-cycle".
"If funds in the sector are predominantly focusing on income, they will typically have a natural long-term bias to high yield. That in itself is not a bad thing.
"Sometimes, buying a strategic bond fund that has a bias to high yield can be preferable to buying a pure high yield fund because they can use derivatives to smooth returns.
"However, we have had a long period where we had very low yields from defensive fixed income, so a lot of fund managers have stuck with high yield."
Moore said this has been "the right call" over the past decade because high yield bonds have correlated with equity markets, which have fared well.
But he warned: "However, we are mindful that we are fairly late cycle and have suffered periods of volatility like Q4 last year.
"The underlying liquidity within the market can disappear very quickly, so if you are a strategic bond fund manager and you want to rotate your portfolio away from the higher-risk areas to more defensive areas, it can be very difficult and expensive to do when there is not a market to sell [to]."
One fund Moore favours is the £1.4bn Fidelity Strategic Bond fund, which has been managed by Claudio Ferrarese and Timothy Foster since the start of the year, following manager Ian Spreadbury's retirement.
"We were very comfortable with the management change because the succession plan has been in place for a long time," Moore said.
"This is a strategic bond fund in the traditional sense, but they do use derivatives at their discretion to hedge risk."
Moore dovetails this with the $100m Legg Mason Western Asset Global Short Duration Blue Chip Bond fund, as at least 80% of its portfolio is invested in A- rated bonds or higher which "ensures a permanent bias to quality".