After a multi-decade rally in bonds, factors such as the tapering of QE and improving economic conditions have led many market commentators to say that yields on fixed income assets can only rise from their current levels, meaning investors could be hit by huge capital losses.
This trend has already started to happen, with 10-year gilt yields rising from around 1.7 per cent 18 months ago to roughly 3 per cent today. However, as cautious investors are reticent to be overly exposed to riskier assets such as equities, the demand for fixed income is unlikely to fall away completely.
Rob Gleeson, head of FE Research, also says there will undoubtedly be bond managers who can still unlock value in a rising yield environment just as there have been equity managers who have delivered very high returns over the last five years despite a relatively poor economic backdrop.
With that in mind, FE Trustnet asked the experts which fixed income funds investors can be comfortable parking their money in for the long-term.
Fidelity Strategic Bond
In a difficult environment, investors will always want to have as much flexibility as possible. Because of that, strategic bond funds feature heavily in this list.
"In the strategic bond market, we like the Fidelity Strategic Bond fund," said Tim Cockerill, investment director at Rowan Dartington.
"The manager Ian Spreadbury is quite conservative in his approach, which I think is important. He also has a lot of experience, which is going to be key if the bond market continues to change and I think his strategy should fit well."
FE Alpha Manager Spreadbury has managed the £1.4bn Fidelity Strategic Bond fund since its launch in April 2005, although he has been managing funds in the IMA universe since the mid-1990s.
According to FE Analytics, the Fidelity Strategic Bond fund is a top-quartile performer in the IMA Sterling Strategic Bond sector over five years, with returns of 54.24 per cent, beating the average fund’s returns by nearly 20 percentage points.
Performance of fund vs sector over 5yrs
Source: FE Analytics
Spreadbury runs a very diversified portfolio of more than 500 holdings, which include corporate bonds, government bonds and high yield credit plus a number of collective investment vehicles such as the FF Emerging Markets Inflation Linked Bond fund.
Fidelity Strategic Bond has an ongoing charges figure (OCF) of 1.21 per cent and requires a minimum investment of £1,000.
Henderson Strategic Bond
"This fund has a different character to Fidelity Strategic Bond as it is a bit more aggressive," Cockerill explained.
"But again, the managers and the team around them have a lot of experience. They are the type of funds that I would anticipate to be best placed to make the most out of the changing conditions in the fixed income market," he added.
The £1bn Henderson Strategic Bond fund is managed by the duo of John Patullo and Jenna Barnard. Since its launch in November 2003, the fund is a top-quartile performer in the IMA Sterling Strategic Bond sector, with returns of 74.14 per cent.
Performance of fund vs sector since Nov 2003
Source: FE Analytics
The fund has a much higher yield than Spreadbury’s portfolio, at 5.8 per cent.
The managers get that level of income from a portfolio that is primarily skewed towards higher risk assets, with 48.7 per cent of the portfolio in high yield corporate bonds.
Patullo and Barnard also have 33.6 per cent in investment grade corporate bonds and 10 per in cash; however they have no exposure to sovereign debt.
The fund has an OCF of 1.45 per cent and requires a minimum investment of £1,000.
Jupiter Strategic Bond
FE Research’s Charles Younes (pictured) says FE Alpha Manager Ariel Bezalel’s five crown-rated Jupiter Strategic Bond fund is a good option for investors who do not have either the time or the expertise to manage their fixed income exposure.
"Bezalel has taken full advantage of his unconstrained mandate," Younes said. "By varying the portfolio’s allocation to government bonds or high- or low-rated corporate bonds according to his assessment of the economy, he has generated outstanding performance since the fund’s inception."
"Bezalel has a great deal of experience investing in bond markets and his absolute-return mindset gives him an edge over many of his competitors in his sector."
"The fund is a good choice for an investor with no strong feelings about bonds and who wishes to outsource responsibility for this asset class entirely," he added.
Bezalel has managed the £1.5bn Jupiter Strategic Bond fund since its launch in June 2008. Our data shows it is the best-performing portfolio in the IMA Sterling Strategic Bond sector over five years, comfortably beating the Iboxx Sterling Non-Gilt All Maturities index in the process.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund also has an attractive 5.4 per cent yield. It requires a minimum investment of £500 and its OCF is 1.5 per cent.
Royal London Short Duration Global High Yield Bond
Outside of the Strategic Bond sector, Cockerill also likes Royal London Short Duration Global High Yield Bond as he says its strategy can protect investors if the price of fixed interest assets continues to fall.
"This is a fund where the name suggests what you are buying into," Cockerill, said.
"This is the type of fund we expect to perform quite well as the world begins to unfold and issues such as the Fed’s tapering and gradually rising yields come into play," he added.
The Irish-domiciled Royal London Short Duration Global High Yield fund was launched in February this year and is managed by Azhar Hussain. It has so far amassed more than £100m worth of assets under management.
Since its launch, it has returned 3.17 per cent while – as a point of reference – the FTSE British Government All Stocks index has lost 1.4 per cent.
Performance of fund vs index since Feb 2013
Source: FE Analytics
The fund has a yield of roughly 5 per cent and only invests in conventional corporate bonds. Its duration is 0.8 and all of its assets will mature within the next five years.
Royal London Short Duration Global High Yield Bond requires a minimum investment of £1,000 and has an OCF of 1.05 per cent.
TwentyFour Monument Bond
Gordon Smith, fund analyst at Kilik & Co, says that another alternative option is the TwentyFour Monument Bond fund, which primarily invests in residential mortgage backed securities (RMBS).
"The fund, managed by TwentyFour Asset Management, offers protection against a rising interest rate environment and lower correlation to broader fixed income markets from a diversified portfolio of high-quality UK, European and Australian RMBS with at least a BBB- (or equivalent) investment-grade rating at the time of purchase," he said.
The £85.4m TwentyFour Monument Bond fund is headed up by the team of Ben Hayward, Eoin Walsh, Gary Kirk and Rob Ford. It offers investors a yield of 2.72 per cent, which is relatively inflation-proofed due to the nature of the assets it holds.
The fund has returned 5.83 per cent over the last 12 months, which is favourable compared with the average fund in either the IMA Sterling Corporate Bond or the IMA Gilts sectors.
Performance of fund vs sectors over 1yr
Source: FE Analytics
TwentyFour Monument Bond has an OCF of 1.37 per cent and requires a minimum investment of £5,000.