With this in mind, FE Research analyst Charles Younes (pictured) believes there is a growing case for global bond funds, which are able to access markets with more attractive dynamics, and strategic bond portfolios, which have greater flexibility. Here are three top-rated funds that appear in the FE Select 100.
Investec Emerging Markets Local Currency Debt
"One fund that has good long-term potential is the Investec Emerging Markets Local Currency Debt fund, run by FE Alpha Manager Peter Eerdmans," said Younes.
"He believes that as emerging market countries develop, their bonds will look less risky and will trade at an ever-smaller discount compared with developed nations, increasing their value."
"Over the long-term this should also lead to an appreciation in the value of their currency, providing an additional source of returns."
"This makes a much more attractive proposition than the situation facing most UK bond funds," Younes added.
Performance of fund vs sectors since launch
Source: FE Analytics
Investec Emerging Markets Local Currency Debt fund has been by far the best-performing bond portfolio in the IMA universe since its launch in June 2006, boasting returns of more than 125 per cent.
By contrast, the average Global Bonds fund has returned 55.98 per cent, while the average Sterling High Yield and Sterling Strategic Bond portfolios have returned 42.44 and 31.95 per cent respectively.
With a payout of 6.1 per cent, it is also one of the highest yielders. Only 0.9 per cent of Eerdmans’ assets are invested in AAA debt. Most is invested in BBB and BB rated securities, which have a combined weighting of 71.2 per cent.
Russia is its biggest regional position, accounting for 14.8 per cent of assets, followed by Turkey, Brazil, Mexico and Indonesia.
The £2.1bn fund has a minimum investment of £1,000 and a TER of 1.66 per cent.
Old Mutual Global Strategic Bond
"When FE Alpha Manager Stewart Cowley joined Old Mutual in 2009, he was given four targets: to outperform cash, grow investors’ capital and beat his benchmark and the other global fixed income funds," said Younes.
"Despite not managing all four every year, the flexibility of the manager’s investment approach allows him to profit from both short-term and long-term opportunities and the fund should prosper when the market settles down and begins a steady recovery."
Performance of fund vs sector since June 2009
Source: FE Analytics
According to FE data, the £782m portfolio has returned 34.84 per cent since Cowley took over, beating its IMA Global Bonds sector average, albeit with more volatility.
Cowley’s fund is defensively positioned, with almost 80 per cent of its assets invested in AAA debt. Most of this investment grade weighting is in government bonds, particularly in the US and UK. It also has significant positions in Canada and Denmark.
"Crucially it has the flexibility to up its risk exposure once the manager gets more bullish," added Younes.
Old Mutual Global Strategic Bond has a minimum investment of £1,000 and a TER of 1.14 per cent. It is currently yielding 1.6 per cent.
Jupiter Strategic Bond
Younes says FE Alpha Manager Ariel Bezalel has turned heads of late, and with good reason.
"Despite a negative outlook for bonds in general, there are still some standout funds on the FE Select 100 and one is definitely Jupiter Strategic Bond," Younes continued.
"Run by FE Alpha Manager Bezalel, the fund is not constrained by any benchmark and can invest in a range of bonds, including the government and non-rated corporate types."
"Bezalel also enjoys investing in "out-of-the-box" niche positions that are not followed by mainstream fixed income investors, which should help him to maintain the fund's excellent track record."
Performance of fund vs sector since launch
Source: FE Analytics
The fund has beaten its sector by a considerable margin since its launch in June 2008, and its one-year historic yield of 4.9 per cent is above average.
Its assets are spread quite evenly across AAA, BBB, BB and B rated debt. Bezalel has a particularly strong weighting to Australian government securities, which account for the three biggest single positions in the portfolio.
Jupiter Strategic Bond has a minimum investment of £500 and a TER of 1.51 per cent. The five crown-rated portfolio has experienced mass inflows of late, pushing AUM to £1.2bn.
FE Research and FE Select are FE services used by financial advisers. Investors wishing to benefit from them should use an adviser who subscribes to the relevant service.