Is a strategic bond fund right for you?

Fixed income can’t claim to be the most exciting asset class, but strategic bond funds are certainly one of the more interesting parts of this overlooked area. Often described as a one-stop shop for fixed income, these funds give investors access to a broad mix of bonds — without having to make the decisions themselves.

Managers of these portfolios have the freedom to blend traditionally stable government and corporate bonds with riskier (and potentially more rewarding) high yield names. By outsourcing decisions like asset allocation, credit selection, and duration management, investors can tap into professional expertise and a diversified approach—all within a single fund.

But what investor types are most suited to these products and what do they need to know about them before committing their money? We take a closer look at how these products work and the conditions in which they flourish, as well as highlighting five funds worth considering.

What are bonds?

Let’s start with some basics. Bonds are effectively loans that investors make to either governments or companies that are looking to raise money. The issuer of the bond agrees to pay them fixed interest payments while the loan is outstanding and hand back the original investment on an agreed future date. They are generally regarded as being safer investments and often recommended for more risk-averse individuals wanting to protect gains already made. However, that doesn’t mean they’re 100% safe. In fact, some bonds offer a higher interest rate in exchange for an increased threat of the issuer defaulting on the agreement.

Ratings and types of bonds

Bond issuers are rated by credit agencies on the likelihood of them meeting these obligations. This also helps would-be investors gauge the level of risk they’re taking. For example, bonds rated AAA are investment grade and seen to be low credit risk. However, those rated BBB or below are known as high yield bonds, meaning the default risk is higher.

When you start exploring the fixed income market, you’ll see there are plenty of funds that focus on bonds with particular ratings – or particular regions. The outlook for such portfolios will depend on what happens to key economic metrics in these areas, such as the level of interest rates.

More flexibility

This is where strategic bonds come into play. Fund managers focused on this area can scour the entire fixed income spectrum in their search for attractive positions. But it’s important to note that no two strategic bond funds are the same. Each manager will have their own style, preferences, and risk appetite — so it’s crucial to look under the bonnet and understand what you’re getting. 

Depending on their aims and objectives, this means they can hold a mixed bag of investment grade corporate and government bonds, as well as enjoying the added spice of some high yield. Of course, the increased freedom afforded to managers of these portfolios can come at a price. If they make the wrong calls then it’s their investors who will suffer. However, the strategic bond sector features many hugely knowledgeable investment professionals with years of experience under their belts.

Five strategic bonds we like

So, if you like the idea of a strategic bond fund, where should you start? To help with your search — and to show just how varied this sector can be — we’ve highlighted five funds that each take a different approach, whether through asset allocation, duration, or their level of risk.

M&G Optimal Income

We start with perhaps the best-known name in the world of UK bonds. A solid core option, M&G Optimal Income is the company’s flagship fund that benefits from a truly flexible mandate. This so-called go-anywhere approach allows the manager to change the interest rate exposure and invest across the entire fixed income spectrum —  it can even hold a small amount in equities. 

The fund’s lead manager, Richard Woolnough, is hugely experienced and one of a few to have demonstrated an ability to add value in various ways. The fund currently has 51% in government bonds, with just under 30% in investment grade corporate bonds and 5% in high yield names*.

GAM Star Credit Opportunities

This is a specialist fund focused on high income, with a strong bias towards bonds issued by financial companies — where the team believes the best opportunities lie. It tends to invest in the junior debt of investment grade companies, which enables it to generate a decent income, while maintaining a high-quality portfolio. 

Because of the heavy tilt towards financials, the fund can be more volatile relative to its peers, particularly in times of market stress. It follows a low turnover strategy, aiming to buy and hold bonds long term. As an added bonus, the fund’s higher yield reduces its sensitivity to interest rates. Its current duration is 2.5 years, with 4% yield*. 

Man Dynamic Income

The aim of this fund is to provide income and capital growth over the medium to long term by investing in bonds issued by companies and governments. It takes a high-conviction approach, with a particular focus on small and mid-cap issuers — an area that manager Jonathan Golan believes is under researched but full of potential. 

The fund has a lower duration than many peers (currently just 2 years*), which means it’s less sensitive to interest rate changes. In terms of credit quality, 40% are in BB bonds, 32% in B and around 22% in BBB, while financials, banks, real estate and energy are among the most popular sectors. This fund can also buy into emerging markets, with currently 13.5% in Latin America*. The fund’s running yield is 7.58%*.

Nomura Global Dynamic Bond

Our next contender is a global fund run by the hugely experienced and charismatic Richard ‘Dickie’ Hodges. A veteran of this asset class, Dickie starts by identifying the most attractive sectors and investment themes, then uses in-depth research to find the best opportunities.

This is an unconstrained, total return focused fund that invests across the full bond universe — from government and corporate bonds to emerging market and inflation-linked bonds. Dickie can also use derivatives for dynamic portfolio construction and risk management.

With a truly global remit, the fund currently includes exposure to South Africa, Romania, and Mexico, alongside the UK and US.* It’s a strong choice for investors looking for yield and potential capital growth in a range of market conditions.

Premier Miton Strategic Monthly Income Bond

This fund could suit investors looking for a steady monthly income while keeping volatility in check. Co-managed by Lloyd Harris and Simon Prior, it aims to deliver both income and capital growth over the long term — defined as five years or more.

With a bias towards investment grade bonds, it can invest up to 60% in lower-quality names if the opportunity is attractive. At present, 72% of the fund is in investment grade, and 13.5% is in high yield. The highest credit rating is BBB (43%), followed by A (23%) and BB (12%). The banking and financial services sectors make up more than 50% of the portfolio.*

Although it’s a relatively young fund, we believe it could appeal to investors who want a well-diversified and regular source of income, with a current yield of 6%*.

*Source: fund factsheet, 31 March 2025