Although issues such as looming interest rate rises in the US and the UK and high valuations are hanging over fixed income markets, many investors will want to have some bond funds in their portfolios to offer diversification from equities.
Although there are a number of well-established bond funds to choose from, some will also prefer to buy into a promising new fund before the rest of the crowd catches up as many of the most popular portfolios now have multi-billion AUMs – which could mean they come unstuck in a potential liquidity driven sell-off.
This means, however, investors have to search for portfolios with shorter track records and lower assets under management than the top funds. They also have to take somewhat of a leap of faith, given that they don’t have historical performance to rely on.
Nevertheless, to identify funds that might be worth looking into further, we filtered for those that were launched within the last three years and have outperformed their average peer over at least the past year. This was narrowed down further by screening for portfolios that still have assets under £300m but have managed to attract more than £50m.
After this, there were three funds left covering the IA Sterling Corporate Bond, IA Sterling High Yield and IA Global Emerging Market Bond peer groups. We take a closer look at each of them in the article below.
With total assets of £57.5bn, the IA Sterling Corporate Bond sector is the largest fixed income peer group and the fourth biggest in the entire Investment Association universe.
One recent launch in this space has ticked all the boxes for the article – the £71.8m Threadneedle UK Social Bond fund, which has been managed by Simon Bond since launch in December 2013. Over this time, it’s made a 10.45 per cent total return, which is slightly ahead of its average peer.
Performance of fund vs sector over 1yr
Source: FE Analytics
The fund, which yields 3.10 per cent, focuses on bonds issued by companies, governments, voluntary organisations and charities that engage in socially beneficial activities and development. Portfolio construction is aided by a social assessment methodology developed by Columbia Threadneedle and Big Issue Invest, which is the social investing arm of The Big Issue.
Threadneedle UK Social Bond currently has 27.4 per cent of its portfolio in housing and property bonds, with 17.7 per cent in transport and communications infrastructure, 14.9 per cent in utilities and the environment, and 14.6 per cent in health and social care. Other sectors include financial inclusion, education, learning and skills, employment and training, and community services.
Threadneedle UK Social Bond has a clean ongoing charges figure (OCF) of 0.52 per cent.
High yield bonds have a had a strong few years as quantitative easing programmes around the globe pushed investors into riskier assets in search of higher yields. The asset class has also held up well over 2015, making a small return while areas such as gilts and investment grade bonds found progress more challenging.
Royal London Short Duration Global High Yield Bond, which is managed by Azhar Hussain, was launched in April 2013 and is the only IA Sterling High Yield fund to make it onto the list, following a gain of 9.99 per cent. There were periods over this time when it was lagging its average peer, but the fund has tended to have significantly lower volatility and maximum drawdown than the sector.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
As its name suggests, the portfolio is built around debt with a maturity of one or two years, thereby capitalising on low default rates as the manager’s research shows the majority of defaults take place in the first three years of the life of a bond.
Royal London Short Duration Global High Yield Bond is currently yielding 3.8 per cent. Some 86.2 per cent of assets are in bonds with 12 months or less to maturity, with only 6.1 per cent in the 12 to 18 months bracket and 7.7 per cent with more than 18 months to maturity.
Its OCF is 1.01 per cent.
IA Global Emerging Market Bond
Emerging market debt remains a niche asset class among UK investors although there are an increasing number of fund launches covering the space. One which has had a good start is Richard House’s Standard Life Investments Emerging Market Debt fund.
The fund was launched in October 2012 after House joined the firm from Threadneedle, where he was head of emerging market debt. Since inception the fund has made 6.83 per cent, which contrasts with an 8.08 per cent loss from its average peer, while its numbers over the past year are also strong.
Performance of fund vs sector over 1yr
Source: FE Analytics
Standard Life Investments Emerging Market Debt also looks good on other metrics when compared with its average peer. While it’s third quartile for annualised volatility, it sits in the first or second decile for alpha generation, maximum drawdown and risk-adjusted returns as measured by the Sharpe, Sortino and Treynor ratios.
When it comes to holdings, just over one-third of assets are in Latin America, with Asia accounting for 20.1 per cent, central and eastern Europe 18.1 per cent and Africa and the Middle East 7.3 per cent. It largest overweight are to Hungary, India and Vietnam, while South Africa, Russia and Columbia are the biggest underweights.
The £179m Standard Life Emerging Markets Debt fund has yield of 3 per cent and an OCF of 0.77 per cent.
