Single asset funds find it even more difficult to generate a positive return every year, as they have limited powers of hedging. If the FTSE tanks 20 per cent one year and you’re a UK large cap manager, you’re going to find it very hard to eke out a positive return. There are, however, a handful of pure equity and bond funds that have consistently made investors money even when their chosen asset class is struggling. Very few would be comfortable being classed as absolute return managers, but their ability to protect against the downside and also participate when markets rise is extremely appealing.
“Relative performance is of course very important, but it’s interesting to note that this is seldom brought up when a fund loses money,” said John Blowers (pictured), head of Trustnet Direct.
“If a fund loses 28 per cent and the market loses 30 per cent, it’s not really seen as a win. However, one that can protect investors from the worst and even generate a positive return is hugely significant. If you make losses, you have to work twice as hard to make them back,” he added, noting that a fund must make 100 per cent one year to eradicate a 50 per cent loss the year previous.
Here, in the first of a two part series, we look at the bond funds that have managed to generate a positive return in at least eight of the last 10 calendar years.
Bonds
Fixed interest, particularly investment grade, is typically seen as a low-risk area of the market, protecting investors better against the downside than riskier assets such as equities.
True to form, a number of bond funds have delivered a positive return in the vast majority of calendar years over the past decade, and some even more than that.
FE data shows 44 funds across the numerous IMA bond sectors have managed a positive return in at least eight of the last 10 calendar years. Most of these lost less than 5 per cent in the years that they failed, including a number of gilt funds. Government bonds are typically beneficiaries of risk aversion, and many focusing on this area made money in both 2008 and 2011.
Seventeen have managed the feat in nine of the last 10 calendar years, including a number of gilt and high yield funds. There were some that lost a hefty sum in the one year, including the likes of Royal London Sterling Extra Yield and Old Mutual Corporate Bond, which lost around 30 per cent in 2008.
However, some gilt funds and a handful of corporate bond funds such as SVS Church House Investment Grade Fixed Interest and M&G Short-Dated Corporate Bond lost less than 2 per cent in their one down year.
An elite list of four funds has managed a positive return in every calendar year: M&G Index Linked Bond, Newton Index Linked Gilt, Schroder Institutional Index Linked Bond and Schroder All Maturities Corporate Bond. With the exception of the last, all of these sit in the IMA Index Linked Gilt sector, meaning they specifically target a return in excess of inflation.
Schroder All Maturities Corporate Bond sits in the IMA Corporate Bond sector and tends to invest exclusively in investment grade paper.
Source: FE Analytics
All four funds have impressive relative records in their respective sectors. The Schroder All Maturities Corporate Bond portfolio is a top quartile performer over 10 years, and has also been one of the least volatile, with a max drawdown of only 5.45 per cent. This compares to almost 10 per cent for the sector average.
It's also the only fund that has managed to beat inflation in each of the last five calendar years, delivering more than 2 per cent on every occasion.
Performance of fund and sector over 10yrs
Source: FE Analytics
Ben Willis (pictured), head of research at Whitechurch Securities, has historically viewed certain bond funds as a possible alternative to absolute return; however, these days he is more wary of taking such a view.
“I’ve used them in the past for this reason, but recently we’ve had to change that view,” he explained.
“We used AXA US Short Duration High Yield Bond, which had a very low volatility and healthy yield. If you look at its risk profile it had a small drawdown in 2008. Back in the day we bought it as a volatility dampener and a yield booster, but the problem now is that the prices of the bonds it holds have gone through the roof.”
“All bonds have had a great run over the years and government bonds in particular. Looking ahead they could come under pressure – they may not make a sudden and sharp loss, but more gradually they could lose you money.”
While bonds have historically held up well when equities have sold off, a spike in interest rates could cause both asset classes to sell-off, Willis says, as they did in 1994.
Some industry stalwarts with more than 15-year record have delivered impressive absolute returns on a relative basis for even longer than 10 years. M&G Short Dated Corporate Bond and Royal London Index Linked Gilt have only lost money in only one of the last 18 calendar years. The only year the latter lost money was in 2013, when it fell just 0.17 per cent.
M&G Strategic Corporate Bond, AXA Sterling Index Linked Bond and L&G All Stocks Index Linked Gilt Index are also worth a mention. These have all delivered a positive return every calendar year since inception, but haven’t quite got a 10-year track record. There are a handful of bond funds in the IMA Targeted Absolute Return sector that target positive returns in all market conditions. These have the ability to short certain areas of the market, helping them to make positive returns even as yields rise.
Among the best performing and highest profile is the Newton Global Dynamic Bond portfolio, which has managed positive returns in six of the last seven calendar years, only losing 0.13 per cent in 2011.
In an article later this week, we will look at the ‘accidental absolute return equity funds’, including the likes of Invesco Perpetual High Income and Murray International IT.