A big rise in bond yields over the past year has altered the equation for plenty of investors. In theory it makes income-generating alternative assets less appealing on a relative basis, while making the traditional 60/40 portfolio of equities and bonds look more attractively valued than it has done for a long time. On a more basic level bonds look less expensive and more attractive from an income perspective, with the caveat that prices could yet have further to fall. Fixed income is finally interesting once again.
And so certain bond funds have found themselves back in vogue. The Investment Association’s UK Gilts sector took in a net £412mn in retail flows in September, making it the best-selling fund cohort for the month followed by the UK Index Linked Gilts sector with £202mn. But it’s not just gilts that might catch your eye, given yields have tended to rise across the fixed income space more generally.
Where should investors look? If we look at stated yields, there’s plenty of funds offering higher levels of income (and lower starting valuations) for those who understand what they’re getting into. Parsing the data, we can see that some of the riskier bond funds continue to offer chunky yields. Take Baillie Gifford Emerging Markets Bond (GB00B39RMP13) with an 8.6 per cent distribution yield at the end of October, Schroder High Yield Opportunities (GB0009505586) on a 6.4 per cent yield and the high yield-focused strategic bond fund Royal London Sterling Extra Yield Bond (IE0032571485) with a gross income yield of between roughly 6 and 7 per cent, depending on which share class you look at.
Juicy as such numbers are, there’s obviously a fair amount of risk attached. Emerging market debt is certainly one of the riskier parts of the bond market, as is high yield. The latter in particular comes with a good degree of economic sensitivity, something that doesn’t bode well if we plunge into recession.
It’s therefore worth reiterating that investors can bag some good yields even on those bonds traditionally seen as boring. Government bonds are finally offering yields that turn heads, and the story is similar for investment grade corporate debt. To give one example, Jupiter Investment Grade Bond (GB00B1XG8T67) recently came with a distribution yield just shy of 4 per cent.
And yet a more diversified approach also comes with its merits too. I’ve pointed to names like the Royal London fund that have a flexible remit but tend to focus on riskier parts of the market, but those strategic bond funds with a more balanced approach can also hold their own here. If we look at some of the major names in that sector Jupiter Strategic Bond (GB00B544HM32) had a stated distribution yield of 4.6 per cent at the end of October, with M&G Optimal Income (GB00B1H05601) on 4.2 per cent.
Investors will and should have plenty of reservations about bonds. They seem complicated to some, they still look vulnerable in an era of inflation and tighter monetary policy, and perhaps they fail to capture interesting trends in the way that both equities and alternatives can. But good yields are available to those who are interested – and you don’t need to go right up the risk spectrum to get them.
