Dig out fixed income opportunities with Royal London Corporate Bond

One way to get broad fixed income exposure is a corporate bond fund that can buy both higher-quality debt with defensive characteristics, and other assets with the potential for greater risk and reward. A fund of this kind that has stood out is Royal London Corporate Bond (GB00BD3GHR10).

Its managers, Jonathan Platt and Shalin Shah, begin their investment process with a review of the macroeconomic outlook to identify the most attractive corporate bond markets. This is followed by a rigorous investigation of the fundamental characteristics of specific bonds and the companies that issued them. Analysts at research company The Adviser Centre point out that the fund's investment team carries out significant research to understand "the long-term creditworthiness of each issuer, the likely outcome in a worst-case scenario and the degree to which investors are compensated for these risks".

This can result in the fund deviating significantly from the broader market, with its managers holding more esoteric bonds alongside higher-rated debt. Data provider Morningstar notes that while much of the fund is invested in conventional debt, its managers also seek “low-profile” bonds, including those without a credit rating.

This approach has paid off handsomely. The fund has made better returns than iBoxx UK Sterling Non-Gilts All Maturities index and the Investment Association (IA) Sterling Corporate Bond fund sector average, over one, three, five and 10 years. The fund has also delivered a reasonable level of income and had a distribution yield of around 3.5 per cent at the end of October.

Royal London Corporate Bond has a variety of sector exposures. These included 14.7 per cent of its assets in bonds issued by banks and financial services, and 12.8 per cent in bonds issued by insurance companies at the end of October. Its managers’ focus on debt fundamentals has also led them to lesser-known areas such as social housing bonds, in which the fund had 10.5 per cent of its assets at the end of October.

The credit ratings of the fund’s holdings are also fairly diverse. Around 40 per cent of its assets were in highly-ranked debt with a rating of A or greater at the end of October. BBB bonds – the bottom end of higher-quality, investment grade rated bonds – made up 41.4 per cent of the fund's assets. Bonds rated BB or lower made up 9.2 per cent of its assets and unrated bonds accounted for 8.5 per cent.

The fund's inclusion of lower-rated and more obscure bonds incurs a number of risks. If an issuer of one of the bonds the fund holds defaults on its debt, it could be detrimental to the fund's returns. Lower-profile bonds can also be harder to buy and sell, so it could be harder for the fund to dispose of its holdings in them.

And with many bonds looking expensive, investors need to be careful about their approach to fixed income.

However, this fund's managers' rigorous investment process means they are still finding opportunities amid difficult conditions.

And Royal London Corporate Bond is well diversified, with 342 holdings at the end of October, so its exposure to default and liquidity risks is diluted.

The significant experience of this fund’s managers, their in-depth research process and stellar track record also offers some reassurance. So, if you are needing to diversify with some fixed income exposure, Royal London Corporate Bond Fund still looks like a good option. Buy. DB

Royal London Corporate Bond Fund (GB00BD3GHR10)