The worst-performing fixed interest sector so far this year is IMA UK Gilts, which has lost just 3.68 per cent over the period.
The IMA Global Bonds, IMA High Yield and IMA UK Index-Linked Gilts sectors have made small profits, while IMA Sterling Corporate Bond and IMA Sterling Strategic Bond are down just 1.39 and 0.47 per cent, respectively.
Performance of bond sectors in 2013
| Name | 2013 (%) |
|---|---|
| IMA UK Index - Linked Gilts | 1.58 |
| IMA Sterling High Yield | 0.78 |
| IMA Global Bonds | 0.46 |
| IMA Sterling Strategic Bond | -0.47 |
| IMA Sterling Corporate Bond | -1.39 |
| IMA UK Gilts | -3.68 |
Source: FE Analytics
The IMA Global Emerging Markets sector has lost more than all of the bond sectors over the period, down just under 5 per cent.
Yields have fallen slightly since the initial sell-off, with governor of the Bank of England Mark Carney’s confirmation that interest rates will stay at historical lows for the time being proving particularly favourable in the UK.
However, even at the very bottom of the sell-off, bond funds coped relatively well. Our data shows that the max drawdown – which measures how much an investor would have lost if they bought and sold at the very worst moments – for all of the IMA bond sectors is significantly less than 10 per cent in all cases.
The IMA High Yield sector has the lowest drawdown, at 3.66 per cent, while the IMA UK Index Linked Gilts sector has the highest, at 7.28 per cent.
Performance of IMA sectors in 2013
Source: FE Analytics
Even the very worst individual bond funds seem to have held up relatively well over the period. Emerging market debt funds dominate the bottom of the charts, but only 11 have lost more than 5 per cent so far this year. The very worst performer – Legg Mason Asset Emerging Markets Bond – is down 8.4 per cent.
Considering that a number of long-only equity funds have lost well in excess of 10 per cent, this is not as bad as it looks.
Mark Dampier (pictured), head of research at Hargreaves Lansdown, agrees that the bond sell-off has been overplayed.
He points out that the vast majority of bond managers saw this risk coming and were correctly positioned to protect against the threat of rising interest rates. "Most of the managers have been massively short-duration," he explained. "Some of the long-dated US tips have been badly beaten up, down around 20 per cent at one point, but no-one was in them."
Dampier does not believe that there will be a significant sell-off in bonds until there is a real threat of interest rates going up. Given Carney’s recent comments, he says this is unlikely to happen in the US for a long while yet.
"I think you’re right – the sell-off has been overdone," he said. "I do think we’re towards the end of the 30-year bond bull run, but is it over now? I’m not so sure. Until interest rates go up, I just can’t see there being an all-out sell-off."
"When cash is yielding 0.5 per cent and you can get 3 per cent on a government bond, I think there’s still a case for them. Until this changes, I don’t think you can just dismiss them outright."
Dampier says he has recently added to the Royal London Sterling Extra Yield fund in his personal portfolio. It is currently yielding 6.8 per cent and has five FE Crowns.
Gavin Haynes (pictured), managing director at Whitechurch, points out that many of the giant bond funds that were criticised for being too big have proved their doubters wrong so far.
"Size in bond funds can be an issue, but it all comes down to how you manage it," he explained. "I think those criticising the big funds need to have a look at their own performance before having a go at a group like M&G." "It’s interesting to note that the Optimal Income fund hasn’t really been impacted by the sell-off, even though a lot of people questioned whether it would have the flexibility to deal with a changing market."
According to FE data, Richard Woolnough’s £15.6bn M&G Optimal Income fund has returned 2.73 per cent so far this year, with a max drawdown of 3.61 per cent – lower than its sector average.
Performance of fund vs sector in 2013
Source: FE Analytics
M&G Optimal Income is a top-quartile performer in its IMA Sterling Strategic Bond sector over three and five years, and second quartile over one.
It is available for a minimum investment of £500 and has ongoing charges of 1.41 per cent.
Other strong performs across the fixed interest sectors so far this year include M&G Global Macro Bond, Artemis High Income, Invesco Perpetual Monthly Income Plus and Royal London Sterling Extra Yield, which have all returned at least 4 per cent this year.
There have been varying levels of success for the largest and highest-profile bond funds in the IMA universe. Ariel Bezalel’s Jupiter Strategic Bond fund – one of the bestsellers of the last 12 months or so – has managed 0.83 per cent so far this year, while the $9bn Templeton Emerging Markets Bond fund has returned 3.21 per cent, even though emerging market debt has been badly hit by the recent sell-off.
It has been a little less positive for Ian Spreadbury’s Fidelity Moneybuilder Income fund and Bill Gross’s Pimco Total Return Bond fund though, which are down 1.95 and 3.03 per cent, respectively.
