Many investors’ portfolios should have an allocation to assets other than equities for diversification. And with cash rates so low bonds can be a useful component in income portfolios. But although bonds can be less volatile than equities they are far from risk-free, so you need to be selective about the types of bond funds you invest in. For this reason, we continue to include many strategic bond funds in our selection. Their managers can invest across the fixed-income spectrum in an unconstrained way, focusing on the areas that look best and avoiding less desirable ones. However, strategic bond funds can be higher risk than traditional corporate bond funds, so are not necessarily suitable for lower-risk investors.
NEW ENTRANT: Allianz Strategic Bond (GB00B06T9362)
Government bonds were one of the few investments to protect portfolios from the volatility that tore through equity markets in February and March, but investors may now feel wary of this asset class. Government bonds again look massively expensive, potentially limiting their ability to rally at times of crisis. They also look vulnerable to a return of inflation if this comes to pass.
In this context, we would suggest that defensive bond exposure is best achieved via some of the flexible funds that can invest across the fixed income universe. Allianz Strategic Bond stands out both in terms of flexibility and its track record of protecting investors at times of uncertainty.
The fund performed enormously well in both the 2020 sell-off and late 2018, another time of severe market volatility. Unlike some other strategic bond funds it is specifically run as a diversifier against equity volatility, with a target of zero correlation with the MSCI World equity index over a three-year rolling period.
The fund has a range of tools at its disposal. Manager Mike Riddell can invest in government and corporate bonds across the world, but he can also use derivatives to take long and short positions on currencies and bond indices. Ahead of the sell-off that began in February, for example, the team was shorting high yield bond indices and going long the Japanese yen, which tends to rise in times of volatility. DB
MI Twenty Four Dynamic Bond (GB00B57TXN82)
MI Twenty Four Dynamic Bond is a strategic bond fund which aims to provide an attractive level of income, along with the opportunity for capital growth. Its management team invest in a broad range of fixed-income assets including investment-grade, high-yield and government bonds, and asset-backed securities. They have a highly flexible approach to enable them to take advantage of prevailing market conditions.
They also use derivatives to optimise or reduce exposures, with the aim of performing well in both rising and falling rate environments throughout the credit cycle.
Jupiter Strategic Bond (GB00B544HM32)
Jupiter Strategic Bond aims to provide income with the prospect of capital growth by investing in a range of different bonds globally. These include high-yield, investment-grade, and government bonds, and floating rate notes. The fund can also use derivatives for investment purposes.
It has been managed by Ariel Bezalel since launch in 2008, and he is supported by Harry Richards, Vikram Aggarwal and a team of credit analysts.
“Mr Bezalel has an aptitude for reading the economic cycle,” comment analysts at FundCalibre. “This and some solid stock picking has seen Jupiter Strategic Bond perform well [and Mr Bezalel’s] generally cautious approach has resulted in the fund outperforming its peers in many falling markets.”
Royal London Sterling Extra Yield Bond (IE00BJBQC361)
Royal London Sterling Extra Yield Bond aims to achieve a high level of income and offered a yield of over 6 per cent at the end of June. The fund aims for a gross redemption yield of 1.25 times the gross redemption yield of the FTSE Actuaries British Government 15 Year index.
The fund has a good long term performance record but is one of the racier options in the IA Sterling Strategic Bond sector. At the end of June, it had 40.6 per cent of its assets in high yield bonds and 31.8 per cent in unrated bonds which have the potential to offer high returns but are considered more likely to default.
However, because it is a strategic bond fund with the freedom to invest in different areas of the debt markets, its manager Eric Holt could allocate away from these areas if there are problems. Mr Holt has extensive knowledge of investment grade and high yield corporate bonds gained over a career spanning more than 30 years.
SRI OPTION: Royal London Ethical Bond (GB00BJ4KSY83)
If you want to access the stock picking skills of Eric Holt, manager of Royal London Sterling Extra Yield Bond, via a less racy approach Royal London Ethical Bond might be a good choice. It consistently beats the IA Sterling Strategic Bond sector average but invests predominantly in investment-grade corporate bonds, in which it had nearly three-quarters of its assets at the end of June 2019.
Although a good choice for all kinds of investors seeking a bond fund of this risk profile, it could be of particular interest to ethical investors. The fund avoids bonds issued by companies involved with alcohol, armaments, gambling, tobacco, pornography and non-medical animal testing, as well as ones that have a high environmental or human rights impact. The M share class also has a reasonable ongoing charge of 0.55 per cent.
SRI OPTION: Rathbone Ethical Bond (GB00B7FQJT36)
Rathbone Ethical Bond has a very good performance record and its returns out it ahead of many funds which don’t have ethical constraints. It aims to deliver a greater total return than the IA Sterling Corporate Bond sector, after fees, over any rolling five-year period and offered a yield of around 4 per cent [at time of writing] so was one of the higher yielders in its sector.
The fund is run by Bryn Jones, head of Rathbones’ head of fixed income team, and Noelle Cazalis. They mainly invest in investment-grade bonds which are considered less likely to default.
When choosing bonds to invest in they consider the economic environment to determine which industries they want to own, and then assess factors including issuing companies’ managements, debt and cash levels, whether there is any asset backing and the loan agreements. They also look at prices with the aim of investing in the best value bonds.
Rathbone Greenbank assesses potential investments against positive and negative social and environmental criteria. It excludes bonds issued by companies involved in areas including alcohol, armaments, animal testing, tobacco and high-carbon-impact activities. It favours bonds issued by companies that have progressive or well-developed practices in areas including employment, human rights and management of environmental impacts.
AXA Sterling Credit Short Duration Bond (GB00B5VL0B78)
AXA Sterling Credit Short Duration Bond is a lower risk bond fund that delivers largely positive returns, low volatility returns. The fund’s investment team, led by Nicolas Trindade, aims to provide a consistent income by generating a higher yield than cash. The team mainly invests in high quality corporate bonds with expected maturities of less than five years to reduce the effect of fluctuations in interest rates.
The fund has a very low ongoing charge of 0.41 per cent.
M&G Global Macro Bond (GB00B78PH601)
Similar to a strategic bond fund, M&G Global Macro Bond can invest in many types of fixed income giving it the ability to focus on better performing areas and, importantly, avoid ones that don’t look so good. But it has an added flexibility – it can invest in bonds denominated in currencies other than Sterling.
At least 80 per cent of the fund is invested in bonds issued by governments and companies from across the world in any currency. The fund’s investment team select bonds, and determine exposure to markets and currencies on the basis of in-depth analysis of bond issuers, and an assessment of global, regional, and country-specific macroeconomic factors.
The fund has a good record of beating the IA Global Bonds sector average and broad bond indices such as Bloomberg Barclays Global Aggregate. Its lead manager is Jim Leaviss, chief investment officer of public fixed income at M&G Investments. He and his team aim to provide a combination of capital growth and income higher than the IA Global Bond Sector average return over any five-year period.
They can also make extensive use of derivatives.
M&G Emerging Markets Bond (GB00B4TL2D89)
M&G Emerging Markets Bond invests at least 80 per cent of its assets directly or through derivatives in emerging markets government, government-related institution or company bonds. These bonds can be denominated in any currency, including emerging markets currencies. It aims for capital growth and income higher than that of a composite benchmark over any five-year period. At the end of July the fund had a yield of over 6 per cent.
M&G Emerging Markets Bond’s investment team is led by Claudia Calich who has more than 20 years of experience in emerging market investments and is supported by a team of independent credit analysts. They select investments by assessing global, regional, and country-specific macroeconomic factors, and analysing individual bond issuers. They diversify the fund by investing in a range of bonds across emerging markets.
At the end of June, the fund had 25.8 per cent of its assets in local currency government debt, 41.3 per cent in hard-currency government debt and 28.9 per cent in hard-currency credit.
Baillie Gifford High Yield Bond (GB0030816713)
Baillie Gifford High Yield Bond Fund aims for a combination of income and capital growth, and at the end of July had a yield of about 4 per cent. It invests at least 80 per cent of its assets in sub-investment grade bonds, primarily denominated in European currencies hedged to sterling. High-yield bonds are a riskier type of fixed-income security that are considered more likely to default, but this risk is compensated for with higher yields than those of less risky bonds and the potential for strong returns.
The fund’s managers, Rob Baltzer and Lucy Isles, select holdings on the basis of their own merits favouring bonds issued by under appreciated, resilient businesses. They typically hold between 50 and 90 holdings, and aim to hold them for at least three to five years.
The fund has one of the lowest ongoing charges of all active funds available to UK private investors of 0.37 per cent.
Henderson Diversified Income Trust (HDIV)
Henderson Diversified Income Trust invests in debt assets across the world including secured loans, government, high yield, unrated corporate and investment grade corporate bonds, and asset backed securities. It can also use derivatives to enhance returns and reduce risk.
It paid a dividend of 4.4p per share in respect of its last financial year and had a yield of 4.9 per cent at the end of July.
It is run by experienced fixed income managers Jenna Barnard and John Pattullo, co-heads of strategic fixed income at Janus Henderson.
At the end of June, it had 55.5 per cent of its assets in high yield and 37.5 per cent in investment grade corporate bonds.
The trust has performed well compared to many other debt focused investment trusts recently. “[It] has been doing well thanks to its focus on credit quality and – crucially - sectors and companies that have defensible business models,” says James Carthew, head of investment companies research at QuotedData.
The trust has also been helped by not having exposure to airlines, autos, non-food retailers, commodity related businesses or emerging markets.
Henderson Diversified Income’s ongoing charge of 0.89 per cent makes it one of the cheapest listed debt funds.
City Merchants High Yield Trust (CMHY)
City Merchants High Yield Trust aims to provide a high level of income and capital growth, and has maintained a consistent level of dividend for several years. It has performed well in comparison to many of its listed debt fund peers and offered an attractive yield of 5.6 per cent at the end of July.
It mainly invests high yield bonds, with a substantial allocation to ones issued by non-financial companies that its managers think have a low likelihood of default. It has smaller allocations to more speculative positions alongside significant exposure to the financial sector via subordinated bank and insurance bonds.
City Merchants High Yield had been run by highly regarded and experienced managers Paul Read and Paul Causer, co-heads of the fixed interest team at Invesco, since 2003. However, in July Mr Read and Mr Causer stepped back as managers. Rhys Davies, a co-manager on the trust, was appointed lead manager and Edward Craven was appointed deputy manager. But Mr Read and Mr Causer continue to provide support along with the wider fixed interest team. And analysts are comfortable with the continuity of the investment process.
“We do not expect this to result in any significant changes, given that Rhys Davies is a long-standing member of the team who has already been involved in the running of the [trust] for several years,” says Priyesh Parmar, associate, investment companies research at Numis Securities. “The Invesco fixed interest team is well respected and [also] manages several large open-ended funds, which in aggregate have assets of more than £8bn.”
The new managers are also experienced. Mr Davies became co-manager of the trust in June 2016, and was deputy manager between July 2014 and June 2016. He has been involved with running the trust for many years since joining Invesco in 2002.
Mr Craven is a senior credit analyst who has worked in Invesco’s fixed interest team for over nine years, and has more than 17 years’ financial services experience.
| Fund/benchmark | 1-year total return (%) | 3-year cumulative total return (%) | 5-year cumulative total return (%) | Ongoing charge plus any performance fee (%) |
| AXA Sterling Credit Short Duration Bond | 1.4 | 3.8 | 8.3 | 0.42 |
| Rathbone Ethical Bond | 5.5 | 14.9 | 34.4 | 0.66 |
| Allianz Strategic Bond | 26.2 | 45.8 | 56.2 | 0.65 |
| MI TwentyFour Dynamic Bond | 3.4 | 10.2 | 22.5 | 0.77 |
| Jupiter Strategic Bond | 2.6 | 12.0 | 24.6 | 0.73 |
| Royal London Ethical Bond | 3.0 | 12.8 | 30.2 | 0.55 |
| M&G Global Macro Bond | 2.0 | 12.5 | 44.1 | 0.78 |
| Henderson Diversified Income share price | 6.4 | 15.9 | 35.1 | 0.91* |
| City Merchants High Yield share price | 4.6 | 11.9 | 36.60 | 1.02* |
| Royal London Sterling Extra Yield Bond | (2.7) | 8.6 | 32.2 | 0.40 |
| Baillie Gifford High Yield Bond | 1.2 | 10.4 | 28.0 | 0.37 |
| M&G Emerging Markets Bond | (5.5) | 7.8 | 57.3 | 0.75 |
| JPM EMBI Global Diversified index | (6.6) | 8.7 | 55.7 | |
| Markit iBoxx GBP NonGilts index | 3.3 | 11.8 | 29.9 | |
| BBgBarc Global Aggregate Hdg index | 2.3 | 10.5 | 17.7 |
Source: Morningstar, *AIC.
Performance data as at 31 August 2020.
**Data shown is for a different share class to the one indicated in the text
For all our selections across various sectors, see below:
Global equity income (4 funds)
Overseas equity income (6 funds)
