Our data shows that the £9.6bn M&G Optimal Income and £1.2bn Fidelity Strategic Bond are both yielding less than 3 per cent – well below the average porfolio in the IMA Sterling Strategic Bond sector, which is yielding 4.55 per cent.
Other funds in Richard Woolnough's sought-after fixed income range are also delivering bottom-quartile yields, with the £6.5bn M&G Corporate Bond and M&G Strategic Corporate Bond funds yielding just over 3 per cent, roughly one percentage point lower than the IMA Corporate Bond sector average of 4.12 per cent.
Yield of bond funds
| Name | Yield (%) |
| IMA Strategic Bond | 4.55 |
| M&G Optimal Income | 2.92 |
| Fidelity Strategic Bond | 2.85 |
| IMA Corporate Bond | 4.12 |
| M&G Strategic Corporate Bond | 3.16 |
| M&G Corporate Bond | 3.12 |
Source: FE Analytics
Fidelity says the calculation used to determine distribution yield was a “conservative assumption” and said a running yield of 3.9 per cent, after factoring in fees, was a “more representative figure”.
Distribution yield is the yield returned over the current year, while the running yield is the projected yield on the fund.
A spokesperson for the firm said: “In general, the fund’s yield has been falling gradually in line with the market trend. Over time companies have been able to refinance at lower rates and that impacts on the yields available.”
“Maximising yield is not the only focus for investors in this fund – it is more about getting the best balance of risk and reward.”
“Ian [Spreadbury] follows a strategy that seeks to optimise relative weightings across fixed income asset classes, while ensuring diversified and uncorrelated holdings limit the potential for negative surprises.”
A spokesperson for M&G also defended the funds' below average yield, and said investors should focus more on risk-adjusted total return over the long-term.
"We believe that investors should not focus on headline yields," the spokesperson said. "We do not manage our funds with a focus on the yield; instead, we focus on maximising total returns. Our funds have tended to be slightly lower yielding historically and yet our returns have been very strong in absolute and relative terms."
"Investors also need to bear in mind that a higher yield typically means more credit risk. One of our main positions currently is that we have a lower financials exposure compared with some peers. Financials are generally yielding more than traditional corporates right now because the market believes there are greater risks involved with investing in the sector."
With yields at record low levels, many bond managers are being forced into riskier assets in order to boost their yields. However, both the Fidelity and M&G portfolios have retained their focus on investment grade bonds.
It should be noted that all of the funds mentioned above are top-quartile performers in terms of total return over five years, but their ability to generate income has clearly been limited of late.
Woolnough’s Strategic Corporate Bond and Corporate Bond funds are ranked first and second in the IMA Corporate Bond sector over five years, returning 66.46 and 52.07 per cent respectively, while the M&G Optimal Income fund ranks second in the IMA Sterling Strategic Bond sector over five years, with returns of 62.01 per cent.
Addtionally, Spreadbury’s Fidelity Strategic Bond fund is top-quartile in IMA Strategic Bond over a five year period, returning 52.53 per cent, nearly doubling the sector average of 28.91 per cent.
Performance of funds vs sector over 5 yrs
Source: FE Analytics
In spite of these funds' stellar record, FE Alpha Manager David Coombs says he is finding it increasingly difficult to find a place for Strategic Bond funds across his multi-asset portfolios.
“In general we see a lot of asymmetric risk with fixed income and don’t see much value,” he said. “We can’t see yields coming down much further, so there’s only so much bond managers can do.”
“It doesn’t feel like you’re being rewarded at this level, which is why we’ve chosen to up our exposure to equities – not necessarily equity income which we also feel is stretched, but in the growth area.”
Gary Potter, co-head of multi-manager at Thames River, says he holds the Fidelity fund as a defensive play, but feels there are better opportunities for total return in the equity space.
“The amount of money going into this area at the moment does slightly worry me,” he said. “I don’t think the returns going forward are going to be what you’ve seen. People are going into corporate debt almost as a halfway house because they don’t like equities.”
“Equities markets are a much better place for total return potential because the returns and requirements for returns [in fixed income] have been reduced significantly. We would be a bit cautious at these levels.”