Barnard (pictured), co-manager of the £1.1bn Henderson Strategic Bond fund with John Pattullo, says bonds have not lost their place in investors’ portfolios, not least for their diversification benefits. She adds that investors who have come to expect a stellar total return – as seen in recent years – need to change their expectations for fixed income in the years ahead.
"We’re heading back to an environment where you invest in bonds purely for income," she said.
"Income will be the primary driver of returns, which isn’t terrible. But people have had such a good run in bonds and that’s just not replicable where we are today."
"We’re just being realistic and adopting a more-income focused target than a total return target."
Bonds have been the place to be in the last five years or so, delivering strong returns compared with equities, with a fraction of the volatility.
Performance of sectors over 5yrs
Source: FE Analytics
Barnard says expecting such strong total returns going forward is unrealistic, but believes investors should not discount bonds because they can offer both a strong income and dampen portfolio risk.
"We’re actively trying not to take on more risk," she explained.
The Henderson Strategic Bond fund is less volatile than the majority of its peers, with an annualised score of just 6.97 per cent over the last five years.
It is also one of the highest-yielding funds in the IMA Sterling Strategic Bond sector, paying out 5.6 per cent.
The fund is a top-quartile performer in its sector over one and five years, although it is bottom quartile over three – owing to a difficult 2010 and 2011.
Over five years, the fund has made 46.01 per cent, while the IMA Sterling Strategic Bond sector has gained 38.38 per cent, our data shows.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The fund requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.45 per cent.
The majority of the portfolio is made up of corporate and investment-grade bonds – owing to the managers’ defensive style. However, they do hold some of the portfolio in high yield bonds.
"In the high yield space we have a preference for a combination of seasoned companies like cable TV and broadband providers and beverages and healthcare companies," Barnard said.
More than half of the fund is invested in the UK, with companies such as British healthcare organisation Bupa, the Daily Mail and Virgin Media featuring in the top-10 holdings.
The fund’s two largest holdings are Dutch cable operator Ziggo and short-dated US Treasuries.
Barnard says the team has been picky when it comes to the bonds they’re adding to the fund.
"We’re avoiding the frothy, newish ones in the market where frankly quality isn’t where it used to be a few years ago," she said.
Instead, she says they are sticking with seasoned credits, such as defensive industrials, and avoiding peripheral bonds.
Barnard says the current climate is very "late cycle" in credit. She says the early stages mean companies are working on improving the quality of their balance sheets.
However, she warns that as the credit cycle goes on, the quality of bond issuance deteriorates as companies become more aggressive.
She says this is evidenced through highly leveraged acquisitions, such as Warren Buffett’s recent takeover of US-based food conglomerate Heinz.
In light of these developments, Barnard says the environment "starts to be a bit more equity friendly and less credit friendly".
While Barnard is not expecting the annual double-digit total returns that bond investors previously enjoyed, she says she has not been too bearish in light of the economic backdrop.
Many financial experts argue there is a potential bubble in government bonds, with yields at historic lows and nowhere to go but up from here. However, Barnard says the short-term concerns are currently overplayed.
"We would expect a correction in government bond yields, just not necessarily this year," she said.
Instead of shying away from low-yielding gilts and Bunds, the team has been increasing its exposure to government paper to hedge against risk in the portfolio.
"There’s not value but they still work very well in a risk-off environment," Barnard said.
"We use them to protect the portfolio if there’s going to be a period of risk."
Barnard also co-manages the Henderson Preference & Bond, Henderson Fixed Interest Monthly Income and Henderson Cautious Managed funds, as well as the Henderson Diversified Income IT.
Barnard and Pattullo have been running the £763.7m Henderson Fixed Interest Monthly Income fund since June 2011.
With a pay-out of 5.8 per cent, it is one of the highest-yielding funds in the sector.
Barnard joined Pattullo on the Henderson Preference & Bond fund in 2006. The portfolio is paying out a healthy 5.6 per cent yield.
Each of the funds have outperformed the IMA Sterling Strategic Bond sector over the last year, and delivered consistently positive returns over three and five years.
This article was written in collaboration with and is sponsored by Henderson Global Investors.