The threat of inflation, coupled with rising yields, means that traditional bond assets such as government debt and investment grade corporate credit are not as safe as they have been in the past.
On top of that, low rates of interest coupled with high inflation means your money will be losing value in real terms if left in the bank.
There are, of course, options available out there for risk-averse investors.
Absolute return funds – which aim to make money in all market conditions by investing in a range of securities – have proved to be popular in the past. However, the recent market correction proved all asset classes can move in the same direction at once, with few of these portfolios able to weather the volatility.
Even the £17.5bn Standard Life GARS fund, which is the largest portfolio in the IMA universe and is regarded as one of the best in the absolute return category, couldn’t cope with the May sell-off.
Performance of fund vs sector year to date
Source: FE Analytics
While bond holders are likely to face capital losses over the coming years, many investors and advisers need to keep some exposure to fixed income for its reliability or just for compliance reasons.
Therefore one way investors and advisers can keep their fixed income exposure and hopefully make sure their capital is well protected in a falling market is by using absolute return bond funds.
Absolute return bond funds aim to achieve positive returns for clients in all market conditions regardless of whether interest rates are rising or falling. They can do this by investing in a combination of money market securities, bonds and bond market derivatives.
With this in mind, we look at a selection of absolute return bond funds suitable for cautious investors.
Ignis Absolute Return Government Bond
The Luxembourg-domiciled Ignis Absolute Return Government Bond fund is the most popular in the asset class, having swollen to £1.5bn despite the fact it was only launched in March 2011.
According to FE Analytics, the fund has returned 15.55 per cent since inception. Its benchmark, the Euro OverNight Index Average or EONIA, has actually lost money over that time.
Performance of fund vs index since Mar 2011
Source: FE Analytics
More importantly, the fund has one of the lowest maximum drawdowns in its sector since launch, at -2.51 per cent.
To put that into context, the fund with the highest max drawdown over that time is GLG Emerging Market Diversified Alternative, at -19.24 per cent.
The Ignis fund is designed to provide positive returns no-matter the market backdrop and with low correlation to other assets, including government bonds. The managers aim to achieve that by investing across the sovereign debt market and by using derivatives.
Ben Willis, head of research at Whitechurch, is a fan.
"We have had it in our portfolios for the last 18 months or so and it has done really well for us. We use it not only for our absolute return bucket, but also as an alternative to government bonds," he said.
FE Alpha Manager Bill McQuaker (pictured) also invests in it and uses it throughout his funds of funds to mitigate the risks of the current fixed income market.
Ignis Absolute Government Bond has an ongoing charges figure (OCF) of 1.34 per cent and requires a minimum investment of £1,000.
SWIP Absolute Return Bond
Another possible option for investors is the five crown-rated SWIP Absolute Return Bond fund, which is managed by James Carver.
The £152.2m portfolio attempts to beat the LIBOR GBP 3m index. It has achieved this since its launch in June 2006, with a return of 25.6 per cent against its benchmark’s 19.72 per cent.
However, it is its discrete annual performance that makes it stand out. Apart from in 2008 where it lost 1.97 per cent, it has made money in every year since its launch and is up 3.54 per cent so far in 2013.
Performance of fund
| Name | 2013 (%) |
2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) | 2008 (%) | 2007 (%) |
|---|---|---|---|---|---|---|---|
| SWIP - Absolute Return Bond | 3.54 | 7.63 | 0.54 | 1.63 | 5.75 | -1.97 | 5.24 |
Source: FE Analytics
The fund’s top-10 includes debt issued by corporates such as Vodafone and National Grid as well as bonds issued by the governments of the US, Brazil and Italy. The fund also takes short positions, which account for 13 per cent of its assets.
Although the SWIP fund aims to protect its investors' capital instead of offering income, it does yield 2 per cent.
It has an OCF of 1.14 per cent and requires a minimum investment of £1,000.
BlackRock Absolute Return Bond
Like Ignis Absolute Return Government Bond, Ian Winship’s £73m BlackRock Absolute Return Bond fund was only launched recently and has so far achieved its objectives.
The fund does not try to beat its benchmark and instead "seeks to achieve a positive absolute return for investors regardless of market movements".
The fund was launched in September 2011. Winship’s portfolio returned 3.6 per cent in 2012 and investors who bought the fund in January this year will have seen a slight return of 1.16 per cent, meaning that since inception the fund has made 4.91 per cent.
Performance of fund since Sep 2011
Source: FE Analytics
As well as investing across the traditional bond market, Winship – who is also a managing director at BlackRock – will hold other fixed interest assets such as asset-backed securities and collective investment vehicles.
The fund has a very low duration in order to protect its investors against rising interest rates, takes long and short positions and has a number of currency-hedging strategies.
It requires a minimum investment of £500 and has an OCF of 1.39 per cent.
Click here to learn more about absolute return investment strategies with the FE Trustnet guide to absolute return bond funds.
