Five bond funds launched in 2011 have managed to perform in the top quartile among their peers over their first five years, according to FE Analytics. 
With the Bank of England cutting interest rates to by 25 basis points earlier this month, UK government bond yields continue to drop, while the Federal Reserve hesitation over raising interest rates in the US has slowed the expected rise in yields from US treasuries.
This means that despite the high valuations on offer, many expect fixed income assets to continue to perform well over the medium-term as macroeconomic risks continue to rise and any potential signs of inflation (except in the UK) seem to be subdued.
Therefore, carrying on this series of articles, here FE Trustnet highlights the five young bonds funds that have shot the lights out, and below is a look at each fund individually to see how they managed to outperform some of their more established peers.
The four crown-rated GAM Star Credit Opportunities fund, run by FE Alpha Manager Anthony Smouha, kicks off the list of young bond funds shooting the lights out in its first five years.
It is focused on buying junior lower tiered debt of quality financial companies, with bonds issued by the likes of Lloyds Bank, Prudential and Legal & General and Hiscox among its top ten holdings.
By doing this, the manager aims to provide extra carry (yield) without taking on as much risk, as it is buying the debt of investment grade companies lower down the capital structure.
Performance vs sector and benchmark over 5yrs
Source: FE Analytics
Over the past five years, the fund has outperformed its sector (IA Sterling Strategic Bond) by more than double, while beating its benchmark (Barclays Sterling Aggregate) by 27 percentage points.
The fund is top in its sector over the last five years, returning 74 per cent during the period, and is top quartile over one and three years as well.
While it has been one of the more volatile funds in its sector over five years, its Sharpe ratio – which measures risk-adjusted returns – is top among its peers, at 1.18.
Manager Smouha said: “Given current very low government bond yields and the accommodative monetary policy of the Bank of England, we expect that the higher yield that is offered by our portfolio with its blend of fixed-rate, fixed-to-floating and floating rate bonds will continue to be attractive to investors, when it is difficult to obtain significant income elsewhere.”
The £346m fund currently yields 4.39 per cent and has an ongoing charges fee (OCF) of 1.14 per cent.
BlackRock Overseas Corporate Bond Tracker
Next up is the £1.1bn BlackRock Overseas Corporate Bond Tracker, by far the largest fund on the list, run by Darren Wills.
The passive fund aims to closely track the performance of its benchmark - the Barclays Global Aggregate Corporate ex-GBP.
This strategy (and its inherent bias towards longer duration debt) has meant it is a top decile performer within the IA Global Bonds sector over three and five years, and is second decile over one year. However, its three year tracking error is relatively wide at 1.67 per cent.
Among its top ten holdings include bonds issued by brewer Anheuser-Busch Inbev as well government bonds from Japan and the Netherlands.
Thanks to the index it is tracking, the fund’s largest regional weightings are to the US (56.17 per cent), France (5.97 per cent) and Canada (4.27 per cent).
The fund also has more than 2,904 holdings within the portfolio currently (with a nominal weighted average life of 8.79 years). BlackRock Overseas Corporate Bond Tracker yields 2.67 per cent and has an OCF of 0.16 per cent.
Vanguard UK Long Duration Gilt Index
Another tracker on the list is the Vanguard UK Long Duration Gilt Index, which aims to replicate the Barclays Capital U.K. Government 15+ Years Float Adjusted Bond Index.
The Barclays index consists of bonds issued by the UK government with 15 years or more to maturity and only consists of free floating bonds.
The £232m Vanguard fund is entirely made up of UK gilts and has a yield of a little under 2 per cent, which research house Square Mile notes is low, reflecting the current interest rate environment, while its OCF is 0.15 per cent.
Performance vs benchmark and sector over 5yrs
Source: FE Analytics
Over the last five years, the fund has been a top quartile performer in the IA UK Gilts sector with returns of 84.28 per cent. It’s tracking error and tracking difference (relative to its benchmark) have been just 0.34 per cent and 5.97 percentage points, respectively, over that time.
However, Square Mile said: “It is a long dated gilt index, so may be best suited for those investors with very long time horizons. In the short term the index could be relatively volatile.”
Indeed, the fund, which is first among its peers over both one and three-year periods, has been the most volatile in its sector over five years, but its Sharpe ratio is in the top quartile.
Standard Life Investments Global Corporate Bond
Five crown-rated Standard Life Investments Global Corporate Bond is next on the list of young guns shooting the lights out over their first five years.
Run by Craig MacDonald, the $589m fund is benchmarked against the Barclays Global Aggregate Corporates index hedged against the US dollar.
Performance vs benchmark and sector over 5yrs
Source: FE Analytics
Over the last five years, the fund has outperformed its benchmark by 4 percentage points, returning almost 69 per cent to investors over the period.
The fund, which has been a top quartile performer over one, three and five years, is one of the more volatile among its peers, though this is slightly less than its benchmark, and has a significantly higher Sharpe ratio – the measure of risk-adjusted returns.
It currently yields 3.1 per cent and has an OCF of 0.56 per cent, and despite some uncertainty surrounding the Brexit vote, and more political risk likely to follow with a vote in Italy and the general election in America, MacDonald sees opportunities, though has changed his investment strategy to accommodate these changes.
“Credit spreads had a fairly benign reaction to the UK vote, with the exception of UK, Spanish and Italian banks, which sharply re-priced. We expect a reaction from central banks, with more easing from the Bank of England and the ECB probable. The Federal Reserve is also likely to postpone further rate hikes,” he said.
“As a result, we expect a more range-bound market going forward, which warrants a more tactical positioning at the portfolio level. We believe this will create stock-picking opportunities over time.”
“We maintain a modestly long risk profile and, given increased uncertainty, are shifting towards better-quality issuers where possible.”
Aberdeen European High Yield Bond
Another five crown-rated fund – the Aberdeen European High Yield Bond fund – rounds out this list, having landed in the top quartile among its peers over three and five years.
Managed by Ben Pakenham and Steven Logan, the £147m fund currently yields 6.3 per cent and has an OCF of 0.85 per cent.
Unlike some of the funds above, it invests in bonds with lower ratings, meaning it will receive higher rates of interest, but also has the potential for the companies issuing the bonds to default.
The fund is benchmarked against the Merrill Lynch European Currency High Yield Constrained Index Hedged to GBP.
It is overweight bonds rated that are rated CCC or below – meaning they are high yield bonds rather than investment grade – and is significantly underweight on BB rated bonds.
This is demonstrated in its top ten holdings, where it holds bonds issued by Siemens and Tesco as well as lesser known names such as International Personal Finance and Zinc Capital.
Performance vs sector and benchmark over 5yrs
Source: FE Analytics
Over the last five years, the fund has returned more than the sector but less than the benchmark, as the graph above shows, and has been one of the most volatile in its sector.
