ABRDN STRATEGIC BOND FUND: Taking advantage of Cocos, bank bonds that yield a tasty 7%

Years ago, when Luke Hickmore was a wealth manager, there used to be a rule of thumb for determining what proportion of bonds investors should hold in their portfolio.

Fast forward to the present and Luke is now co-manager of the Abrdn Strategic Bond Fund. Here, since 2010, he has been responsible for managing a portfolio of bonds issued by companies and governments around the world.

And although during those years the bond market has faced tumultuous times, Luke still sees value in the same rule.

“Wealth managers used to say that you should have the same proportion of bonds in your portfolio as your age,” he says.

‘So, for example, according to this rule, at the age of 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 wrong, but it often works in the long run.”

Luke adds that he currently holds a lower ratio of bonds than the formula would recommend. This is because bonds are generally considered less volatile than stocks and are therefore often considered a good option for those approaching retirement who want to profit from their investments. Luke has no plans to slow down for many years so he can afford to maintain his high 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 economic and market conditions change.

Just over half of the £158.5m portfolio is invested in the UK, but the team can invest anywhere they choose.

They look for pockets of value where they believe the market has undervalued investments.

One of those areas is the real estate sector, which benefits from new trends in flexible working.

“We bought bonds from coworking real estate company Workspace in 2023, when the pandemic was really suffering because people were still working from home and the prospects of returning to offices as before were uncertain,” says Luke.

“We returned 5 per cent above 10-year UK bonds, which is equivalent to 8.25 per cent overall.”

Luke is also finding value in banks such as Lloyds, Barclays and BNP Paribas. ‘We have been buying debt called contingent convertibles, known as Cocos. These are issued by banks that then, at the end of the term, buy them back or reissue them. We are getting returns of around 7 per cent.’

These products cannot be accessed by ordinary investors and can only be purchased in a fund. They are risky if a bank runs into trouble, which is why Luke and his team scrutinize its balance sheets and outlook before intervening.

Discussions about the outlook for interest rates are central to the team’s strategy. Luke believes there is a chance that interest rates could be reduced from the current level of 4.75 per cent to 3.75 per cent this year, although this is difficult to predict.

And as bond investors, the last thing you want is to be surprised if rates stay high for longer.

The fund has returned 4.8 percent in one year and 8.7 percent in five.

This compares with an average return of 4.6 and 7.7 percent, respectively, for other strategic bond funds.

The annual fee is 0.6 percent and the exchange’s unique identification code is BWK27Z3.