When the US Federal Reserve announced they would commence bond-buying programmes to support against the economic fallout caused by the Covid-19 pandemic, it effectively helped rescue falling global bond markets.
With the sell-off in financial markets that rattled corporate bonds now behind us, it is worth looking back to see which corporate bond funds managed to limit volatility during the crisis without sacrificing returns.
When a bond fund has high returns and high volatility, it can imply they are taking more risk and getting compensated for it. However, when a bond fund has high returns and low volatility, the implication is that it generally has a higher risk-adjusted return profile.
This is an important consideration for investors who want to assess the consistency and smoothness of returns of their fixed income allocation.
Therefore, Trustnet looked at the funds in the IA Sterling Strategic Bond, IA Sterling Corporate Bond, and IA Global Bond sectors that were top-quintile for both returns and low volatility during the first six months of 2020.
Of the 376 funds across three sectors, only 16 funds delivered top-quintile returns while also ranking top-quintile for low volatility during the first half, as shown below. Where available, the five-year return is also shown.
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Source: FE Analytics
Of those funds, nine were IA Sterling Strategic Bond funds. This sector had the most number of funds that achieved top-quintile returns and volatility despite being the smallest sector with 94 funds in total.
Of the 183 funds in the IA Global Bond sector, just five made the list and they all posted higher returns with one exception.
Only two funds from the IA Sterling Corporate Bond fund made the list, one of which was an index fund.
The highest returning fund in the list was the Allianz Strategic Bond fund with a total return of 25.67 per cent in H1, while also delivering first quintile low volatility of 9.72 per cent.
It has also made a total return of 54.52 per cent over five years, the highest of all the funds in the list and has been a top-decile performer in each of the last five years.
Run by Mike Riddell and Kacper Brzezniak, the £2bn fund has its largest positions in Japanese, Singaporean, and Australian government bonds. Allianz Strategic Bond fund has about two-thirds invested into corporate bonds, of which its largest position is in bonds issued by the world’s largest brewer AB Inbev. As of the end of June, it had a modified duration of 7.56 years, and the average rating of bonds in the fund was A+.
Performance of Allianz Strategic Bond year-to-date
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Source: FE Analytics
There were four other funds in the list that stood out.
Of the 376 bond funds across three sectors, only four delivered top-decile returns and top-decile low volatility.
These four were M&G Global Macro Bond, FP Carmignac Unconstrained Global Bond, Waverton Sterling Bond and Invesco Tactical Bond (UK).
The £1.3bn M&G Global Macro Bond fund stands out as the second highest returning fund in the list, while maintaining top-decile, low volatility of 7.24 per cent.
The £254m Waverton Sterling Bond fund and the £589m Invesco Tactical Bond (UK) fund stand out as the only two funds that delivered top-decile low volatility for a five-year period as well as the H1 2020 period.
Over a five-year period, the Waverton Sterling Bond fund run by Jeff Keen delivered a 29.33 per cent return whilst maintaining an annualised volatility of 3.92 per cent.
The Invesco Tactical Bond fund run by Paul Causer and Paul Read delivered a 15 per cent return whilst maintaining annualised volatility of 3 per cent over five years.
The £744m Carmignac Unconstrained Global Bond fund had one of the higher durations of the funds in the list, which assisted in boosting its H1 returns.
H1 Performance of top decile funds v sectors
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Source: FE Analytics
Most of the bond funds in the list were actively managed bond funds.
What is surprising is that one of the funds that delivered top quintile returns and low volatility within its sector was an index fund.
The £1.1bn L&G Sterling Corporate Bond Index fund was one of the two funds in the IA Sterling Corporate Bond sector that made the list.
This suggests active bond funds in the sector had a more difficult time in managing the volatility during the first half of the year.
The other fund in the sector that made the list was the £223m ASI AAA Bond fund which made 3.75 per cent return during the first six months of the year, but with a 5.27 per cent volatility in H1 it was the lowest performer on the list.