For those investors looking for a safe haven, with a short-time horizon or simply an inexplicable desire to do Gordon Brown a favour, the obvious place to look is in the sovereign debt sector. UK government bonds, or Gilts, represent a loan to the government and are considered one of the safest asset classes. As such the return offered is usually meagre, the IMA UK Gilt Sector returned on average 5.06 per cent a year over the last five years.
While recent events have seen a rush in demand which has pushed up returns, the return for the year ending 31 March 2009 was an exceptionally high 9.75 per cent, this trend is sadly unsustainable and returns are likely to return to their long term average. With such a restricted mandate there is little to choose between the funds in this sector, but that being said the Allianz PIMCO Gilt Yield fund has managed to produce a return of 37.71 per cent over the last five years to the end of March well in excess of the 34.52 per cent achieved by the sector index, and has been top quartile in four of the last five years.
Source: Financial Express Analytics
There is the potential for much higher returns from investing in UK Corporate bonds, but at a much higher risk. Over the last five years only funds in the top quartile have actually made any money while everyone else has returned a loss. Over this five year period, not even the best performing fund managed to beat the UK Gilt sector average. The recent heavy losses for corporate bonds and unusual gains for gilts skew these results slightly, however while you would expect corporate debt to outperform in the future, the relatively modest returns are all too easily wiped out during periods of uncertainty. None the less the M&G Corporate bond fund is top quartile for one, three and five year performance and is managed by Richard Woolnough who has been recognised by Trustnet as an alpha manager who can consistently add value to the fund.
Some of the best returns during the recent meltdown of everything we previously took for granted have been found in the IMA Global Bonds sector. The sector returned 10.17 per cent for the year to the end of March and has produced an average annual return of 4.69 per cent. While this is uninspiring on the surface; there have been some real star performers, the Threadneedle Emerging Market Bond fund has made 61.89% over the last five years and 25.65 per cent in the last year alone. In addition the Schroder International Bond fund has managed to return 57.73 per cent over the last five years and an impressive 32.59 per cent over the last 12 months.
The benefits from holding a bond fund in your portfolio go beyond simply the returns they generate, as the benefits of diversification allow your entire portfolio to benefit from the funds lower risk. As the impressive returns from the global bonds fund demonstrate, when it comes to fixed income funds the more diversification they offer the better.