Of the 309 vehicles among the IMA Sterling Strategic Bond, Sterling Corporate Bond, Sterling High Yield, Global Bond, UK Gilt and UK Index Linked Gilts sectors, only Jupiter Strategic Bond, Fidelity Strategic Bond, M&G Strategic Corporate Bond and Henderson Sterling Bond have a maximum rating for both performance and manager track record.
The fund
M&G Strategic Corporate Bond is the largest of these and arguably the most impressive in terms of risk-adjusted performance. The £4.5bn portfolio is by far the best-performing of its kind since its launch in 2004, with returns of 77.3 per cent. By comparison, the average Sterling Strategic Bond fund returned 34.15 per cent and the second-best performer – M&G Corporate Bond – delivered 63.06 per cent.
The fund is a top-quartile performer over one- and five-year periods as well, with returns of 10.62 and 55.96 per cent respectively.
Performance of funds vs sector since launch
Source: FE Analytics
Both M&G Strategic Corporate Bond and Corporate Bond are headed up by star manager Richard Woolnough, who is one of the most respected fund managers in the fixed interest market.
Woolnough has managed to deliver consistent outperformance with below-average volatility, which, unsurprisingly, has attracted mass inflows into his funds. His funds also tend to outperform in falling markets, illustrated by M&G Strategic Corporate Bond’s strong run in 2008.
In spite of its stellar total return, with a one-year historic yield of 3.16 per cent, the majority of Sterling Strategic Bond portfolios currently provide a higher rate of income.
Investors will have to splash out a minimum investment of £500 to gain exposure to this portfolio, which has a total expense ratio (TER) of 1.16 per cent.
Alternatives
It is a testament to the strength of the manager that Woolnough’s M&G Corporate Bond portfolio is M&G Strategic Corporate Bond's biggest rival. M&G Corporate Bond falls slightly behind its sister fund in the performance tables over three and five years, though it has a superior one-year track record and is yielding slightly more.
It is a simpler product than M&G Strategic Corporate Bond, with slightly less flexibility in certain areas. The strategic portfolio can hold more in high yield debt and tends to have slightly less in investment grade bonds.
With £5.7bn in assets under management (AUM), M&G Corporate Bond is slightly larger, although it has the same price and minimum investment.
The Henderson Sterling Bond fund is also a potential alternative. The portfolio has rallied since FE Alpha Managers Philip Payne and Stephen Thariyan were recruited in April 2009, topping the Corporate Bond sector over three years with returns of more than 80 per cent. However, the fund doesn’t boast a particularly strong long-term track record, and has been more volatile than Woolnough’s portfolios in recent years.
The IFA’s view
Tim Cockerill, head of investment at Rowan Dartington, believes the M&G Strategic Corporate Bond fund could be a better bet than M&G Corporate Bond if the macro outlook keeps improving.
"M&G’s macro analysis has historically been very good," he said. "The group’s high conviction plays have largely paid off, particularly with regard to their negative stance on banks."
"Even when other managers have got excited about the opportunities on offer, Woolnough has always taken a step back and maintained his position."
"The performance of the corporate and strategic corporate bond funds has been pretty similar of late, but the strategic portfolio’s ability to hold more in high yield and make riskier bets means there could be a difference in performance between them."
Verdict
The fund is ideal for a long-term core holding in a cautious or balanced portfolio, offering investors slow and steady growth and decent income with very few surprises along the way.
The greater flexibility of the fund gives it a slight edge over the manager’s M&G Corporate Bond portfolio – particularly for investors optimistic about the potential for economic recovery in western markets. However, its constant overweight in investment grade bonds means it is likely to remain less volatile than its peer group.
Bullish investors who want to maintain some exposure to fixed interest markets may be better off backing Woolnough’s Optimal Income portfolio, which has no limitations in its high-yield exposure.