Fixed interest: The adventurous choice
High-yield bonds offer investors the potential for higher returns, but can share the same risk profile as equities.
The Aberdeen Global Select High Yield Bond fund has returned 75.46 per cent over the past three years, making it the best-performing fund across the IMA Global Bonds, Strategic Bond, Corporate Bond and High Yield Bond sectors during this time.
The portfolio is, however, the second-most volatile across these sectors, with an annualised score of 18.18 per cent over the three years.
The fund invests in sub-investment grade bonds, which typically provide higher returns with a greater level of risk, making them more attractive to adventurous investors.
Meera Patel, senior adviser at Hargreaves Lansdown, claims the end result is similar to that of an equity fund.
"High yield bond funds should in my view be classed alongside equities," she said. "They tend to move in line with equities and at the end of the day they have high yields because they are higher risk."
Top-performing bond funds over 3-yrs
Source: FE Analytics
At first glance the fund’s performance over five years is less impressive than over three, as its return of 38.34 per cent puts it in the bottom quartile of the IMA Global Bonds sector.
However, when all four of the fixed interest sectors are included the returns are in the second quartile, reflecting the relatively poor performance of the other three sectors.
The portfolio’s strong showing in recent years follows a period of relative poor performance.
Between June 2007 and April 2009 the fund lost 41 per cent while the IMA Global Bonds sector was up 22 per cent.
Since then the sector has gained a further 26 per cent while the fund has added a huge 134 per cent.
Performance of fund vs sector over 5-yrs
Source: FE Analytics
The fund is managed by Aberdeen's high yield bond team.
It was known as the Aberdeen Global High Yield Bond fund until a name change last December, and has a total expense ratio (TER) of 1.58 per cent.
Patel says investors can be deceived about the risk profile of bond funds, meaning it is important to understand each portfolio's approach.
"If you look at Invesco Perpetual Corporate Bond for example, I think it’s a high-risk fund because of its exposure to the banks," she said.
Data from FE Analytics
shows that Invesco Perpetual Corporate Bond has a three-year annualised volatility of just 7.62 per cent, but its top-10 holdings include the bonds of Santander, Barclays and Lloyds.