In an article published earlier this week, FE Trustnet took a look at NN Investment Partners research which found that only 3 per cent of institutional investors are completely confident in bond fund managers’ ability to navigate rate hikes.
This perhaps came as no surprise as stretched valuations and low yields prompted by ultra-loose monetary policy from the world’s central banks have led to concern about how the asset class will hold up in the years ahead.
The low yields on offer at the moment mean that bonds are especially vulnerable to interest rate rises from the Federal Reserve and the Bank of England, even if the increase is gradual as many economists predict them to be.
As always though, there are exceptions to the rule and many investment professionals have decided to stay invested in bond funds with experienced managers that they have held for years. Here we take a look at the ‘tried and tested’ bond funds that the professionals are backing.
Meera Hearnden (pictured), senior investment manager at Parmenion, says that Jupiter Strategic Bond utilises the whole of the fixed income universe and can invest in investment grade, government and high yield bonds, as well as seek out opportunities overseas. 
“Being able to navigate the whole of the fixed interest spectrum means the fund should take advantage of a rising yield environment, which I believe should hold it in good stead when the interest rate cycle finally turns,” she said.
FE Alpha Manager Ariel Bezalel, who has managed the fund since its launch in 2008, spends half of his time researching macroeconomics, focusing on monetary policy, monetary supply and the economic cycle.
The other half of his time he dedicates to bottom-up credit research and delegates areas of research to each team member as he believes that filtering ideas is the job of the fund manager.
“Bezalel spends a lot of time looking at the top-down macroeconomic views, which is important in the world of fixed income,” Meera explained.
“He looks at the economic cycle and monetary policy before deciding on where to invest. The fund can also short certain bond markets as it has done so in the past with the US and German government debt.”
Since the £2.6bn fund’s launch, it has returned 86.77 per cent, outperforming its sector average and its iBoxx Sterling Non Gilts All Maturities benchmark by 39.61 and 24.88 percentage points respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Jupiter Strategic Bond has a clean ongoing charges figure (OCF) of 0.73 per cent and yields 4.8 per cent.
Baillie Gifford High Yield Bond
Martin Bamford, chartered financial planner and managing director at Informed Choice, believes that Baillie Gifford High Yield Bond has the potential to do well in a rising rate environment.
“Historically, high yield bonds have done reasonably well when interest rates have risen, as rising interest rates are typically a sign of a stronger economy,” he said.
“Baillie Gifford High Yield is managed by Donald Phillips and Rob Baltzer. It has delivered above sector average performance over the past three and five years, investing in a portfolio of sub-investment grade bonds. The fund is well diversified across issuers and sectors, using derivatives to reduce currency risks.”
Over five years, the fund has returned 48.93 per cent, outperforming its peer average by 6.91 percentage points.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It has been managed by Phillips and Baltzer for five years and aims to provide a high return through both income payment and capital growth.
The portfolio is fairly high conviction and the sector analysts cover no more than 90 companies in order to exercise in-depth due diligence.
The team also takes care not to look like the index, as the largest index constituents are the largest issuers of debt and therefore pose a greater risk to the portfolio.
Baillie Gifford High Yield Bond has a clean OCF of 0.38 per cent and yields 4.7 per cent.
Managed by Eoin Walsh, Gary Kirk, Felipe Villarroel and Pierre Beniguel, the five FE Crown-rated TwentyFour Dynamic Bond fund has significantly outperformed its sector average since its launch in 2010.
Ben Willis, head of research at Whitechurch Securities, is currently invested in the £1.3bn fund alongside Jupiter Strategic Bond.
“In essence, they have the flexibility to invest across the fixed interest range and up and down the credit spectrum,” he explained.
“We appreciate how difficult is to navigate the bond markets and so we are putting our faith in funds and fund managers who have displayed the skill and expertise in doing so over the years.”
Over five years, TwentyFour Dynamic Bond has returned 44.03 per cent, outperforming its average peer in the IA Sterling Strategic Bond sector by 18.82 percentage points.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The team has access to areas of the fixed income market that retail investors don’t usually have much exposure to such as bank debt or asset-backed securities, both of which are areas that TwentyFour have particular expertise in.
Investing in these areas of the market mean that the fund is in the bottom decile for its annualised volatility over five years, but it has also been one of the highest-yielding funds in its sector historically – it currently yields 5.21 per cent.
TwentyFour Dynamic Bond has a clean OCF of 0.81 per cent.
Axa Framlington Managed Income
Also awarded five FE Crowns, Axa Framlington Managed Income resides in the IA Sterling Strategic Bond sector and has returned 98.46 per cent over George Luckraft’s tenure – this is 10.04 percentage points more than its average peer.
Performance of fund vs sector over management tenure
Source: FE Analytics
It also has an FE Risk Score of just 18, which means that the FE Research team deems that the fund to have shown just 18 per cent of the risk of the FTSE 100 over recent year.
“It’s a good performer, it has a decent yield, there’s a well-established manager at the helm and it has the flexibility to include equities,” Hargreave Hale’s Neil Jones said.
Luckraft aims to provide both capital growth and a high level of income and does this through investing mostly in convertibles, corporate bonds and government bonds.
Currently, the fund has an 11.17 per cent weighting in UK equities and 3.31 per cent in international equities. Its largest weighting is in global fixed income at 75.26 per cent, although it also has a 4.28 per cent cash holding.
Axa Framlington Managed Income has a clean OCF of 0.6 per cent and yields 4.17 per cent.
Ryan Hughes, fund manager at Apollo Multi Asset Management, says manager Bill Eigen’s absolute return mind-set and his flexibility to invest in any type of bond instrument means that JP Morgan Income Opportunities could cope well with a rate rise.
“He has been very negative on US treasuries and he’s been positioned for a rate rise this year. In terms of the flexibility he has and the way he thinks about the bond market, he’s really well prepared,” he said.
“I think it’s going to be hard for anyone to do well in the rising rate environment but I think he’s someone that can protect capital very well in a rising rate environment, and if he gets enough calls right, he might actually be able to make a little bit of money as well.”
Since Eigen launched the £4.5bn fund in 2007, it has outperformed its sector average by 1.58 percentage points, providing a total return of 32.92 per cent.
Performance of fund vs sector over management tenure
Source: FE Analytics
As its title suggests, the fund adopts an opportunistic approach to try and beat its benchmark – Eigen primarily invests in the debt and currency markets using financial derivative instruments when he deems it appropriate.
The fund has achieved top-quartile annualised volatility since its launch as well as a top-quartile maximum drawdown, which measures the most money an investor would have lost if they bought and sold at the worst possible times.
JPM Income Opportunity has an initial charge of 3 per cent, a performance fee of 20 per cent and yields 3.1 per cent.
