ABRDN STRATEGIC BOND FUND: cashing in on Cocos – the bank bonds that yield a tasty 7%
Years ago, when Luke Hickmore was an asset manager, there was a rule of thumb for determining what proportion of bonds investors should keep in their portfolio.
Fast forward to the present and Luke is now co-manager of the Abrdn Strategic Bond Fund. Since 2010, he has been responsible for managing a portfolio of bonds issued by companies and governments around the world.
And while the bond market has been through a tumultuous time in recent years, Luke still sees value in the same line.
“Asset managers always said you should have as many bonds in your portfolio as your age,” he says.
‘For example, according to this rule, at age 55 I should have 55 percent of my own investments in bonds and 45 percent in stocks.
“Of course, this theory is often criticized and flawed, but so often it works in the long run.”
Luke adds that he currently owns a smaller portion of the bonds than the formula would advocate. That’s because bonds are generally considered less volatile than stocks and are therefore often considered a good option for those approaching retirement who may want to cash in on their investments. Luke has no plans to slow down in the coming years so he can afford to maintain his risk profile.
He and his team of three focus on maintaining a fund that invests in government and corporate bonds issued anywhere in the world. He sees it as a core option for an investor’s portfolio because of its flexibility: it can adapt as market and economic conditions change.
Just over half of the £158.5 million portfolio is invested in Britain, but the team can invest wherever they want.
They look for valuable places where they think the market has undervalued investments.
One of those areas is real estate that is benefiting from new trends in flexible working.
“We bought bonds from co-working real estate company Workspace in 2023, when it was really suffering post-pandemic as people were still working from home and the prospects of returning to offices as before were uncertain,” says Luke.
‘We achieved a 5 per cent return on ten-year UK government bonds, totaling 8.25 per cent.’
Luke also finds value in banks such as Lloyds, Barclays and BNP Paribas. ‘We have bought debts called contingent convertibles, also known as Cocos. These are issued by banks who then buy them back or reissue them at the end of the term. We achieve returns of about 7 percent.’
These products are not accessible to ordinary investors and can only be purchased in a fund. They are risky if a bank gets into trouble. That’s why Luke and his team are taking a close look at their balance sheets and prospects before taking action.
Discussions about the interest rate outlook are at the heart of the team’s strategy. Luke believes there is a chance that interest rates will be cut from the current level of 4.75 percent to 3.75 percent this year, although that is difficult to predict.
And as bond investors, the last thing they want is for interest rates to remain high for longer.
The fund has achieved a return of 4.8 percent in one year and a return of 8.7 percent in five years.
This is compared to returns of 4.6 and 7.7 percent respectively for other strategic bond funds.
The annual fee is 0.6 percent and the unique exchange identification code is BWK27Z3.
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