Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The bond market is a big one. About $125 trillion big. Yet it’s the measly $65 trillion global stock market that tends to hog investors’ attention.

The sheer size of the fixed income market means there’s plenty of ways to navigate it. Some bond fund managers like to narrow their focus in on parts of the market, perhaps concentrating their portfolios around one particular debt asset or geography.

According to Claudio Ferrarese and Tim Foster, however, fixed income seekers are best served by access to all areas of the market. Their Fidelity Strategic Bond Fund, one of our Select 50 choice of favourite investments, is designed to provide a one-stop solution that answers all bond investors’ needs.

That means these managers have utmost freedom to scour the entire fixed income universe to find the best options available. This ‘go anywhere’ approach to asset allocation explains the ‘strategic’ part of the fund’s title. All bonds are up for offer.

Clear objectives

According to the managers, “typically, bond investors are looking for three things: low risk, a decent income, and a low correlation with equities.”

These managers feel that many other bond funds try to achieve several different things while losing sight of those three central objectives. In contrast, Ferrarese and Foster put them front and centre of their investment approach.

Hence the fund’s stated aims parallel those of the average investor: it “seeks to be a core bond fund aiming to deliver regular income, low volatility and some diversification to other asset classes including equity.”

A recipe for success

It’s with that approach in mind that the managers are drawn to all parts of the bond universe. They feel a ‘blend’ of risk profiles and income levels can combine to deliver those three aims in tandem.

They operate with a benchmark guide of 20% in government bonds, 60% in investment grade (whose issuers look relatively secure but offer lower yields) and 20% in high yield (which offer higher yields but also come with added risk).

In their eyes, this blend captures the best characteristics of each while protecting against their risks. They find it offers lower risk than high yield bonds but higher returns than investment grades, while still exhibiting strong diversification from equities.

Ultimately, however, they’re fairly loose with that ‘blend’. They see those allocations primarily as a benchmark, preferring to let individual stock picking guide their asset allocation.

The managers operate with a clear ‘bottom-up’ focus, meaning they’re keen to focus on individual issuers and their fundamentals before considering their place within the wider economic backdrop. A strong team of credit analysts here at Fidelity recommends their preferred investment ideas before they’re assessed by the managers.

This bottom-up focus compliments the flexibility to explore all areas of the bond universe by allowing the managers to build a balanced portfolio based around individual securities.

That, combined with its emphasis on investing across fixed income asset classes, means the fund is particularly suited to investors looking for lower risk and meaningful diversification from other assets they hold.

More on Fidelity Strategic Bond Fund

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the Fund investing in them. The fund also uses currency hedging. Currency hedging is used to substantially reduce the effect of currency exchange rate fluctuations on undesired currency exposures. There can be no assurance that the currency hedging employed will be successful. Hedging also has the effect of limiting the potential for currency gains to be made. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics covered:

Bonds; Diversification; FundsInvesting for income

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