Out of 378 bond funds in the Investment Association universe spanning across five sectors, just five of them have been chosen by our Adviser Fund Index (AFI) panel to feature in the Cautious, Balanced and Aggressive portfolios simultaneously, according to data from FE Analytics.
This was the most challenging market area in our series to find overlaps in yet, given that aggressive investors are far more likely to go for high yield bonds or emerging market debt while cautious investors will usually opt for investment grade corporate bonds or developed market government bonds.
Performance of indices over 1yr
Source: FE Analytics
The fixed income investment landscape has begun to change over recent years as a result of ultra-loose monetary policy skewing bond yields and causing the traditionally ‘safe’ asset class to converge with higher-risk equities in terms of performance. On top of that, an increasing number of investors have turned to high yield or ‘junk’ bonds to maximise income in a yield-starved environment.
However, as shown in the below list, it seems that index-linked and strategic bond funds seem to be the better option for investors that lie across all risk spectrums. In this article, we take a look at the five funds that have been chosen to feature in all three of the AFI’s Cautious, Balanced and Aggressive portfolios:
First up is Jupiter Strategic Bond, which was launched by FE Alpha Manager Ariel Bezalel in 2008.
The £2.6bn fund predominantly aims to supply a high level of income as well as some capital growth and aims to do so through a combination of high yield bonds, convertible bonds, investment grade bonds and others.
Bezalel initially adopts a macro focus when choosing assets and looks at factors such as global monetary policy, money supply and the economic cycle to decide where to invest.
The second part of his process is bottom-up credit research, which involves spreading the duties of analysing new issues, distressed opportunities and special situations among himself and his team.
In terms of the riskier assets within his portfolio, such as those in the high yield space, the manager believes it is vital to meet the management teams before making a decision.
This investment process appears to have worked well for Bezalel and his team – the fund has outperformed its average peer in the IA Sterling Strategic Bond sector over one, three and five years and has delivered a top-decile total return of 88.44 per cent since its launch. It is also in the top quartile for its annualised volatility and for its maximum drawdown - which measures the most potential money lost if bought and sold at the worst times – over the same time frame.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Jupiter Strategic Bond has a clean ongoing charges figure (OCF) of 0.73 per cent and yields 4.7 per cent
The second fund to be included across all three AFI portfolios is M&G Global Macro Bond, which is managed by Jim Leaviss and deputy-managed by FE Alpha Manager Claudia Calich.
The fund is £1.1bn in size and is able to invest in any type of fixed income holding – it is also able to use derivatives as well as physical holdings. Currently, almost half of the fund is invested in government bonds in regions such as Japan, Mexico, the US, Germany and Mexico.
The corporates that the fund currently holds (26.51 per cent of the fund is weighted to UK corporates) include the likes of Tesco, UBS, JPMorgan Chase and Toyota Motor Corporation.
These holdings are all chosen with the aim of looking through short-term macroeconomic noise in order to understand long-term fundamentals – to do this, Leaviss focuses on inflation, interest rates and global economic growth.
“The freedom afforded the manager is one of the strengths of this fund: Leaviss can use a wide range of instruments to make money. However, it is exceedingly hard to read global macroeconomic movements,” the FE research team said.
“Leaviss has had some success adding value nonetheless, although like most bond fund managers he has been surprised by the continuing persistence of low rates on the least-risky bonds.”
The fund has outperformed its IA Global Bonds sector average over one, three, five and 10 years as well as over the last one, three and six months.
Over the last decade, it has provided a total return of 97.72 per cent, outperforming its peer group composite by 29.19 percentage points.
Performance of fund vs sector over 10yrs
Source: FE Analytics
M&G Global Macro Bond has a clean OCF of 0.8 per cent and yields 2.82 per cent.
Standard Life Investments Global Index Linked Bond
Next up is the SLI Global Index Linked Bond fund, which is £919m and has been headed up by Adam Skerry and Katy Forbes since the start of last year.
Over this time, it has underperformed its sector average in the IA Global Bonds sector by 4.03 percentage points with a total return of 2.93 per cent, although it must be noted that the fund aims to generate both income and capital growth over a long term time frame and the peer group is somewhat of a mixed bag.
Performance of fund vs sector under Skerry and Forbes
Source: FE Analytics
While the fund has underperformed in terms of capital appreciation, it is in the top quartile for its annualised volatility, its maximum drawdown and its maximum loss – the longest-running consecutive loss without making a gain – over the same time frame.
As the name suggests, the fund mostly invests in corporate and government inflation-linked bonds, although the managers are also able to buy into conventional bonds if the right opportunities come along. Currently, 45.2 per cent of the fund is weighted in North America, 30 per cent is in the UK and 20.20 per cent is in continental Europe.
SLI Global Index Linked Bond has a clean OCF of 0.65 per cent.
A more niche offering, this £65m fund has been managed by Tammie Chan for just shy of one year and is at least two-thirds invested in US government bonds or dollar-issued corporates at any one time. These corporates don’t necessarily have to derive from the US and can include large international organisations such as the International Monetary Fund or The World Bank.
In terms of asset quality, the fund’s two largest weightings are in BBB and AAA bonds at 33.9 and 33.8 per cent respectively – while the former is a significant overweight versus its Merrill Lynch composite index, the latter is a 24.6 per cent underweight.
Over Chan’s tenure, the fund has outperformed its IA Global Bonds sector average by 1.76 percentage points with a total return of 8.62 per cent – however, it has achieved a higher-than-average annualised volatility and maximum drawdown as well as a lower risk-adjusted return (as measured by its Sharpe ratio) over the same time frame.
Performance of fund vs sector under Chan
Source: FE Analytics
L&G Short Dated Sterling Corporate Bond Index
The final fund to be featured across all three AFI portfolios is a passive fund that tracks the total return of the Markit iBoxx Sterling Corporates 1-5 index.
The L&G Short Dated Sterling Corporate Bond Index fund is invested in between 70 and 100 per cent bonds at any one time – these assets are issued in sterling by UK overseas companies and have maturities of between one and five years.
Out of these bonds, between 70 and 100 per cent of them are investment-grade (although 95.45 per cent of the entire fund is currently invested in investment grade corporates).
As to be expected, the £250m fund has underperformed its average peer in the IA Sterling Corporate Bonds sector by 3.56 percentage points with a total return of 4.66 per cent since launch – this is because long-dated bonds have outperformed short-dated bonds over this time frame.
Performance of fund vs sector since launch
Source: FE Analytics
Despite this, investors will hold short-dated bonds in their portfolios as a means of diversification and to hedge against interest rate rise impacts. While such bonds don’t often offer a substantial yield, they are so liquid that they are often held in managers’ portfolios as part of their cash weighting.
L&G Short Dated Sterling Corporate Bond Index has a clean OCF of 0.14 per cent and yields 2.8 per cent.