The IA Sterling Corporate Bond sector is the fourth largest peer group in the Investment Association universe with total assets of £59.1bn, meaning most investors are likely to have exposure to one of its members in their portfolios.
Bonds have been decidedly out of favour over 2015 so far after concerns such as negative yields in some parts of the market, a lack of liquidity, a looming interest rate rise by the Federal Reserve and the likelihood of better-than-expected economic growth turned some sour on the asset class.
The latest figures show retail investors pulled £105m from corporate bond funds in May, meaning the sector has not taken fresh net inflows since the £95m that went in over the course of February.
However, bonds remain an important asset class for investors as they offer valuable diversification from equities and, hopefully, a predictable income stream.
With this in mind, FE Trustnet has pulled together a collection of graphs showing how some of the sector’s most popular members have performed when it comes to income distributions.
Invesco Perpetual Corporate Bond
Source: FE Trustnet
The FE Alpha Manager duo of Paul Causer and Paul Read have helmed this £5.5bn fund since launch in September 1995, before being joined by Michael Matthews in March 2013. Over Causer and Read’s time on the fund, it has made a total return of 276.56 per cent, ranking it first in the sector – where the average gain has been 181 per cent.
Around 80 per cent of the portfolio is held in the bonds of companies with the highest credit ratings to offer security, with the remainder in riskier corporate debt or government debt. The fund currently has a significant weighting to the financial sector, particularly the subordinated debt of high quality European banks where the team thinks there is a relatively attractive level of income for the credit risk taken.
Over 10 years to the end of 2014, the fund has handed out £482 in income for an initial investment of £1,000. Its strong track for income and total return has won it a place on the FE Research Select 100 list as well as an ‘AAA’ rating from Square Mile Investment Consulting & Research.
The analysts at Square Mile said: “Given the managers’ focus on value, the fund is likely to have a slightly more volatile return profile than the benchmark, tending to outperform when the corporate bond market is rising but underperform when it is struggling.”
“The fund is likely to be suitable for investors who wish to access an income stream secured by high quality issuers, with the potential for some possible capital upside, and who are prepared to hold the fund for medium to long periods – at least three years.”
Invesco Perpetual Corporate Bond has a clean ongoing charges figure (OCF) of 0.66 per cent and yields 4.05 per cent.
M&G Corporate Bond
Source: FE Trustnet
This £5bn fund is headed by Richard Woolnough, who was named FE Alpha Manager of 2015 thanks to his ability to consistently add value over the market cycle on both absolute and relative points of view.
Since taking over the fund in February 2004, Woolnough has achieved a first-quartile total return of 79.21 per cent – ranking the portfolio tenth of 54 peers in the sector. Over the 10 years to the end of 2014, a £1,000 initial investment led to a total payout of £445.
The manager’s process starts with his outlook on macroeconomic factors such as the direction of interest rates, inflation and economic growth, which leads him to identify the sectors deemed to be most attractive in light of this. The last step of the process is finding companies with the appropriate level of creditworthiness.
The FE Research team said: “Woolnough has an outstanding track record and is one of the most respected managers in the fixed interest markets. 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. This fund is an excellent choice for investors looking for a steady source of income.”
M&G Corporate Bond has a 0.66 per cent clean OCF and is currently yielding 3.57 per cent.
Fidelity Moneybuilder Income
Source: FE Trustnet
Alongside Invesco Perpetual Corporate Bond, this is the only fund in the sector to hold a place on the FE Select 100 and the top ‘AAA’ rating from Square Mile. FE Alpha Manager Ian Spreadbury has run the £3.4bn fund since launch in 1995.
Over the ten years covered in this article, the fund has delivered total income on £442 on a £1,000 initial investment but the graph shows the yearly distributing has been ticking down since 2008. Its total return since launch is 221.86 per cent, which is first quartile against the 172.45 per cent sector average.
Spreadbury has a more cautious approach than many of his peers and favours more defensive sectors such as government bonds, covered bonds and non-cyclical consumer names, which the FE Research team says makes the fund a good core holding.
“This bond fund is set up to be a good diversifier to a portfolio of other assets such as equities. The manager has maintained his exposure to the risks that are specific to fixed income, which paid off in a big way in 2014 but won’t always do so,” our analysts said.
“However, buying bonds in overseas currencies allows the manager to maintain interest rate risk while limiting exposure to the particular rates in this country. We agree with the manager that bond funds which minimise these exposures can’t offer the diversification of a traditional bond portfolio.”
Fidelity Moneybuilder Income has a clean OCF of 0.57 per cent with a 3.54 per cent yield.
BlackRock Corporate Bond Tracker
Source: FE Trustnet
This £1.2bn passive fund is currently one of the most popular in the IA Sterling Corporate Bond sector after capturing net inflows of around £275m over the past 12 months.
BlackRock Corporate Bond Tracker only launched in June 2010, so we’ve including the dividends from inception to the end of 2014. Over this time, an initial £1,000 has netted investors a cumulative payout of £150 while the total return has been 35.22 per cent, which is above the average peer’s 31.84 per cent.
The fund tracks the Markit iBoxx GBP Non-Gilts Overall index, which covers corporate, covered and quasi-sovereign bonds. As this index has a large number of constituents, the fund uses stratified sampling to reduce trading costs while creating a portfolio with the main characteristics of the benchmark.
BlackRock Corporate Bond Tracker has a clean OCF of just 0.17 per cent and yields 3.16 per cent.
Rathbone Ethical Bond
Source: FE Trustnet
Investors with an ethical approach to investing will find that the Rathbone Ethical Bond, which has been managed by Bryn Jones since November 2004, appears on the FE Research Select 100.
Over the decade to the end of 2014 it paid out £543 on a £1,000 initial investments, although the yearly distributions are lower than the £64 they reached in 2010. Over Jones’ time on the fund it has posted a 60.64 per cent total return, against 55.45 per cent from its average peer.
The fund will only hold the bonds of issuers that meet a defined set of ethical criteria. This includes avoiding companies that are involved in the production of alcoholic beverages, gambling, pornography, weapons manufacture or tobacco.
As well as avoiding ‘unethical’ companies, Jones also invests in positive stories such as firms that are providing beneficial goods and services or have a record of community investment.
The FE Research team said: “This fund is simple to understand as an ethical investment; Bryn Jones strongly believes that he can improve society through selective debt financing. Over its history the fund has invested in many educational and social housing programmes. The impact of the ethical screening on bond selection has been positive on the fund’s performance.”
Rathbone Ethical Bond has a 0.69 per cent clean OCF with a 4.50 per cent yield.
