Some managers have recently expressed extreme concern that bond markets are due a huge crash, with JP Morgan’s Bill Eigen being one who thinks “devastation” will hit the bond market in 2015.
Eigen’s worry is that “inevitably” rising interest rates in the US would cause the market to crash.
Others such as Psigma’s Tom Becket say there is a “once in a cycle” buying opportunity in high yield despite a relative underperformance compared with other parts of the bond market.
While past performance is not a guide to the future, FE Trustnet turns to the IMA Sterling Corporate Bond sector in a series looking at funds that have fared best at defending investor capital over the seven years of the past market cycle.
Looking at several key metrics – maximum drawdown, the Sortino ratio and how low a fund’s underlying beta is relative to the sector average – there are just three funds which score top decile for each of the measures over seven years.
The Sortino ratio, very similar to the Sharpe ratio, assesses risk-adjusted returns with a greater focus on the downside.
Two funds from the same group – M&G – top the list over this time period. Both the £4.8bn M&G Strategic Corporate Bond and £5.2bn M&G Corporate Bond funds are top decile for all three measures.
The M&G Strategic Corporate Bond fund is best in the sector of 68 funds for Sortino ratio, second best for max drawdown and has the third lowest beta. The M&G Corporate Bond fund is second best for Sortino ratio, fourth best for max drawdown and has the second lowest beta.
On a total return basis both funds are top quartile over 10 years but more recently they have fallen down the sector rankings into the second quartile over five years and the third quartile over three years.
Over seven years M&G Strategic Corporate Bond fund has returned 81.21 per cent while the M&G Corporate Bond fund is up 67.55 per cent. By comparison, the average fund in in the sector has gained 44.25 per cent.
Performance of funds and sector over 7yrs
Source: FE Analytics
FE Alpha Manager Richard Woolnough has headed up both funds since 2004, with Ben Lord joining as his deputy in 2007.
Despite a previously stated derision to holding banks’ debt, Woolnough has some of his largest holdings in banks’ bonds such in Wells Fargo, Lloyds, JP Morgan and HSBC in the M&G Strategic Corporate Bond. Woolnough also has some US government bonds in his top ten, making up 1.5 per cent of the portfolio.
However, the portfolio is reasonably diverse with only 8.47 per cent in its 10 largest positons and a more than 200 positions greater than 0.1 per cent of the portfolio.
M&G Corporate Bond has a slightly more defensive tilt, with larger amounts of the portfolio in gilts, which make up approximately 3.5 per cent of the portfolio.
The FE Research team says Woolnough has an outstanding track record and is one of the most respected managers in the IMA Corporate Bond sector.
“He is also supported by a well-resourced credit team at M&G. The manager successfully predicted the credit crunch in 2008 and his good performance when things turned sour again in 2011 suggests this was not a fluke.”
Both funds have clean ongoing charges of 0.66 per cent, with M&G Corporate Bond currently having a higher yield than M&G Strategic Corporate Bond – 3.75 per cent compared to 3.66 per cent.
Next up is the SVS Church House Investment Grade Fixed Interest fund, managed by James Mahon since 2001. At £161m this is a relative minnow compared to Woolnough’s two behemoths and is not considered a household name, unlike Woolnough.
It is the only other fund to be top decile for all three metrics with the best max drawdown in the sector and the seventh best Sortino ratio and beta.
Mahon has a high exposure to gilts with at least 12 per cent of the portfolio in the asset class as well as bonds from JP Morgan and Scottish Widows.
A degree of exposure to defensive parts of the market like government bonds mean the fund has underperformed the sector in recent years but over 10 years it has turned in top quartile gains.
Over the past seven years the fund has returned 50.11 per cent, comfortably beating its index as well as the average return in the sector.
Performance of funds and sector over 7yrs
Source: FE Analytics
The fund has clean ongoing charges of 0.93 per cent and the yield is currently 2.84 per cent.
