The likes of Royal London Sterling Extra Yield Bond, Artemis High Income and AXA Framlington Managed Income have paid out the most cash in the form of income in the IA Strategic Bond sector over the past five full calendar years, according to research by FE Trustnet.
The search for income has been ever harder in fixed income markets in recent years with yields pushed lower and lower thanks to higher demand as well as central bank policies such as quantitative easing and ultra-low interest rates.
However, with volatility causing bond yields to spike several times in 2015 the much prophesised end to the fixed income bull market has looked more and more likely as markets appear to be increasingly pricing in interest rate risk.
Performance of sectors in 2015
Source: FE Analytics
This has pushed more investors into ‘strategic’ bond funds over the longer term with a ‘go anywhere’ mandate, as many feel such a strategy is likely to navigate a sell off more effectively than regular bond funds.
However, while most investors have turned to the IA Sterling Strategic Bond sector for total returns and ‘safety’, FE data shows that some of its constituents have paid out high levels of income over the years.
In this study, we take the 51 IA Sterling Strategic Bond funds that have a track record spanning back to at least January 2010 and clock up the cumulative dividends on £10,000 between that point and until the end of 2014.
As this year is not over and funds in the sector pay out at different times, we have to disregard 2015’s pay-outs.
As the table below shows, the highest paying portfolio was the £1bn Royal London Sterling Extra Yield Bond fund, managed by Eric Holt since 2003. On an investment of £10,000 at the beginning of 2010, it returned £4,035.67 over the following five years as income.
The sector average income pay-out over this period was £2,450.94.
Source: FE Analytics
It has also outperformed the sector average in terms of total return in each calendar year, being in either the top or second quartile as well as this year.
According to FE Analytics, the fund has made a total return of 83.06 per cent since 2010, clocking up the best total return in the sector also.
Performance of fund, sector and index since 1 January 2010
Source: FE Analytics
Like Holt’s portfolio, the other strategic bond funds to sit at the top of the income paying table (such as the £1.1bn Artemis High Income fund £278m and AXA Framlington Managed Income fund) tend to have a high weighting to either equities and/or higher yielding corporates bonds.
This is also true for three portfolios run by FE Alpha Manager duo Jenna Barnard and John Patullo: Henderson Fixed Interest Monthly Income, Henderson Preference & Bond and Henderson Strategic Bond as well as SJP Corporate Bond.
The Threadneedle Strategic Bond fund and Premier Strategic High Income Bond fund, the ninth and 10 best payers, have their highest weighting to ‘safer’ investment grade bonds.
This may not come as a surprise to investors, but the fact these funds (such as the Royal London, Artemis and AXA IM offerings) have been able to pay-out more than their average peer in income has come at a cost.
FE data shows that, by focusing on equities and more risky bonds to generate a more attractive yield, the other eight funds have all been more volatile than the average fund in the sector over the period in question.
They also have a given investors more sleepless nights than the sector as shown by their maximum drawdowns, which measures the most an investor would have lost if they had bought and sold at the worst possible times.
It can be an important metric for genuine income investors as most will want the value of their initial savings to not fluctuate too widely. According to FE Analytics, all 10 funds have a greater maximum drawdown over the period in question than the sector average.
In the case of the Premier Strategic High Income Bond fund this has meant a maximum drawdown that is nearly four times greater than the sector.
This fund is also bottom decile for total return over the main period under discussion – January 2010 to December 2015 – highlighting the mixed bag these top 10 payers are in terms of how they performed overall and not just from the point of view of extrapolated income.
It is also worth noting that none of the 10 funds which had made the list have been able to increase their income pay-outs on a regular basis since 2010, with many having had to cut their distributions in three out of the last five calendar years.
However, it must be pointed out that most bond fund managers aren’t aiming to generate income growth like their peers in the various equity sectors.
Charles Stanley’s Rob Morgan (pictured) says broadly fixed income has become less attractive from an income perspective, but says the asset class can still offer a form of diversification against the downside in equity markets.
Nevertheless, he says investors should concentrate on strategic bond funds for a total return point of view rather than an income perspective, warning they are putting their capital at risk by reaching too high for yield in the current market.
“When building portfolios we have found income is more secondary to total return and we would be more likely to use them for diversification than a regular bond fund,” he said.
“The shortcoming of the strategic bond sector is income. While some funds boast quite a high yield, you can’t rely on that. It is going to change a lot more than it is for standard corporate bond funds. However you want that from your strategic bond manager.”
“Clearly yields have come down across the board and so you now looking at bond funds as a portfolio diversifier. If you are going to go low duration then you are going to take away from the income.”