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The best high yield fixed income plays according to the experts

03 May 2017

FE Trustnet continues its series on what investors should expect when looking for an appropriate yield compared to their risk appetite.

By Jonathan Jones,

Reporter, FE Trustnet

Henderson Strategic Bond, Aviva Investors High Yield Bond and Kames Investment Grade Bond are among the top funds for yield in their respective sectors, according to several fund experts.

Yesterday, FE Trustnet looked at the available yields in the UK equities and in fixed income spaces to see what a reasonable level of expected yield is in the current climate.

Following on from this, below we look at the funds the experts are using for their high yield opportunities in all three of the fixed income sectors: IA Sterling Corporate Bond, IA Sterling High Yield and IA Sterling Strategic Bond.

 

High Yield

Starting with the highest of the yielders, Chelsea Financial Services managing director Darius McDermott said: “Finding a bond fund with a higher yield to compensate for higher inflation will be key. The trouble is, the higher the yield, usually the higher the risk.

“If you are willing to take on this extra risk, funds like Aviva Investors High Yield Bond with a yield of 4.87 per cent and Rathbone Ethical Bond with its 4.5 per cent yield are worth a look, as are Invesco Perpetual Monthly Income Plus (5.16 per cent) and Schroder High Yield Opportunities (6.12 per cent).”

All funds named above are top quartile in their respective sectors over the last five years, with Schroder High Yield Opportunities the best performer of the four, returning 52.90 per cent over the period.

Performance of funds over 5yrs

 

Source: FE Analytics

It is the only fund run by an FE Alpha Manager – Michael Scott –  and has a five crown rating. Scott was one of three Schroders managers along Nick Kirrage and Kevin Murphy included in the latest FE Alpha Manager rebalancing, which is designed to identify the most talented fund managers operating in the UK. The £404m fund has a clean ongoing charges figure (OCF) of 0.72 per cent.

The other five-crown rated fund of the above list is Chris Higham and Sunita Kara’s £176m Aviva Investors High Yield Bond fund, which aims to create a high level of income and the best possible total returns from investment in a broad range of bonds, not just high yield.

As such, while high-yield bonds posted disappointing returns in absolute and relative terms in March as sentiment was hit by a number of factors, the fund was helped by its relatively defensive positioning in credit quality and its 10 per cent exposure to lower-risk investment-grade bonds, the managers noted in their latest factsheet.


Sterling Corporate Bonds

Moving down the risk- spectrum, Architas investment director Adrian Lowcock suggests the £1.4bn Kames Investment Grade Bond fund.

“The fund is managed by Stephen Snowden, who is able to successfully combine bottom-up and top-down drivers,” he said.

The primary investment objective of the fund is to maximise total return by investing primarily in investment grade and government bonds, although it may hold a maximum of 20 per cent in high yield bonds.

“Stephen is a very experienced bond manager with a flair for taking advantage of mispriced opportunities within fixed income markets,” said Lowcock.

“Snowden is tactically astute and will reduce risk when the markets are getting frothy, and will also look to invest in opportunities when the market is selling-off. Stephen looks to outperform his peers by concentrating on good credit selection.”

The three crown-rated fund, co-managed by Euan McNeil, has been a top quartile performer over a five-year period and has beaten the average IA Sterling Corporate Bond sector fund over one, three, five and 10 years.

Performance of funds over 5yrs

 

Source: FE Analytics

In its latest factsheet, Square Mile Research added: “Given the high conviction strategy which the managers employ, with a focus on taking on credit risk where it is rewarded, the fund can at times be a little more volatile than the benchmark, tending to outperform during periods of strong corporate bond returns, but sometimes struggling when markets are falling.

“This fund is likely to be suitable for investors who require a relatively high level of income, above that available on UK government bonds, with some potential for future growth, but who are prepared to accept a level of volatility in the capital value of the fund along the way.”

The fund has a yield of 2.81 per cent and an OCF of 0.79 per cent.


Strategic Bonds

Rob Burdett, co-head of multi-manager solutions at BMO Global Asset Management prefers to use strategic bond funds for yield rather than those from the other sectors.

“I guess you would expect it to be somewhere between high yield and investment grade because in theory that is the high and low of their universe,” he explained.

“They can use government bonds, inflation-linked and all sorts and not all do and whenever we look at a strategic bond we look at the breadth of brief the fund manager is given and crucially whether they use the full breadth of that brief.”

The manager does not own any funds in the high yield or corporate bond sectors but does own a number in the strategic bond sector to round fill its fixed income allocation.

“We are trying to hedge our bets in the strategic bonds we hold, so we have Henderson Strategic Bond – run by John Pattullo and Jenna Barnard – which yields 3.98 per cent,” he said.

“They’re pretty cautious on their outlook for the world so we’re quite comfortable with the capital base of that fund and we are getting a premium yield to the sector and it’s definitely a premium to inflation and rates.”

Square Mile Research added: “The fund tends to have a focus on corporate bonds and is therefore likely to perform strongly when these markets are rising, but this can be at the expense of performance in falling markets.

“It may be suitable for investors seeking a mixture of income and capital growth over a market cycle, but who are prepared to accept a degree of capital volatility, particularly over the shorter term.

At the more active and positive end of the market Burdett owns funds such as TwentyFour Dynamic Bond, which has a slightly lower 3.68 per cent yield, “but probably has a bit more of a positive outlook on the market”.

Performance of funds over 5yrs

 

Source: FE Analytics

The £1.1bn Henderson Strategic Bond and £1.4bn TwentyFour Dynamic Bond are ahead of the IA Sterling Strategic Bond sector over three, five and 10 years, with the former in the top quartile over 10 years, while the latter is top quartile over five years (it does not have a 10-year track record). The Henderson fund has an OCF of 1.41 per cent, while the TwentyFour fund has an OCF of 1.28 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.