Bond funds dominate top performers

Morningstar's list of the cream-of-the-crop funds (see below) over the past five years is dominated by bond funds, with corporate bonds and those focused on emerging markets doing particularly well. The majority of these funds made extraordinary returns by investing in various types of higher-yielding bonds, with top performer GLG Global Corporate Bond Fund - which more than doubled investors' money - holding predominantly BBB-rated corporate bonds, together with A-rated bonds.

The second-best performer, Investec Emerging Markets Local Currency Debt Fund, also focuses on investing in bonds in the middle of the credit rating curve, with nearly 50 per cent of its holdings in BB- rated bonds. Companies in the middle of the credit rating curve, which have BBB, BB and B ratings, offer attractive bond yields and relative safety compared with some riskier investments, according to John Pattullo, head of retail fixed income at asset manager Henderson Global Investors.

But even though Investec Emerging Markets Local Currency Debt Fund has performed remarkably well over the past five years, Morningstar OBSR analyst Emma O'Neill warns: "This fund is high-risk in nature and would typically be a peripheral portfolio allocation for investors with a full understanding of the risks entailed in investments in local currency debt. Investors should also be aware that the fund's total expense ratio of 1.66 per cent is above the sector median and consequently provides a headwind to performance."

Morningstar's top 10 performers were the best out of more than 1,300 funds. Funds eligible for inclusion had to be available for sale in the UK with sterling share classes and have a minimum investment limit below £10,000.

Top 10 funds over five years

Source: Morningstar