Jupiter Strategic Bond, JPM Sterling Corporate Bond and Standard Life Investments Global Index Linked Bond are some of the fixed income funds that a panel of leading financial advisers believe could be appropriate for investors of most ages.
This is down to the fact that they and two other bond funds have been included in all three of the FE AFI portfolios, which are constructed by a panel of the UK’s leading financial advice firms and designed to act as indicators of the UK funds market. These five funds are the only bond funds that have a place in all three portfolios.
The FE AFI Aggressive portfolio contains funds that the panel thinks could be suitable for an investor in their late 20s, FE AFI Balanced holds funds for a person in their mid-40s and FE AFI Cautious is made up of funds for those in their late 50s. These selections assume the investor is saving for a pension at 65.
In this article, we take a closer look at the five bond funds that could be appropriate for investors throughout their investment journey.
Standard Life Investments Global Index Linked Bond
Adam Skerry and Katy Forbes’ £1.2bn Standard Life Investments Global Index Linked Bond fund is the only member of the IA Global Bonds sector to be found in all three FE AFI portfolios. The fund also has an FE Crown rating of two.
As its name suggests, the fund invests in sovereign-issued and corporate inflation-linked bonds from around the world and has the US as its biggest geographic weighting, followed by the UK. The fund has made 11.56 per cent over the past five years, underperforming its average peer.
Square Mile Investment Consulting & Research, which gives the fund an ‘A’ rating, said the fund could be a good option for investors seeking protection from UK inflation, despite its global approach.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
“The real returns team at Aberdeen Standard Investments have built up a reputation for indepth analysis and a strong understanding of what drives inflation markets,” the firm’s analysts added.
“This, combined with a detailed process and review discipline, has led, in our opinion, to a fund which is flexible enough to take advantage of the opportunities available in inflation markets, but structured enough to give investors comfort that they will not get any nasty surprises from the fund.”
Standard Life Investments Global Index Linked Bond has an ongoing charges figure (OCF) of 0.65 per cent and is yielding 0.78 per cent.
JPM Sterling Corporate Bond
This £179.7m fund is a member of the IA Sterling Corporate Bond sector and holds four FE Crowns. It is managed by Andreas Michalitsianos and Usman Naeem.
JPM Sterling Corporate Bond invests primarily in JP Morgan’s best ideas in the sterling investment grade market. It is running overweights to bonds issued by financial institutions and utilities, with its top holdings including the likes of Yorkshire Building Society, Aviva and UK Power Networks.
The fund has generated second-quartile total returns over three- and five-year periods but slips into the third quartile on a 12-month view. It has been more volatile than its average peer over the past five years but has produced better risk-adjusted returns, as indicated by the Sharpe ratio.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
In their most recent update, Michalitsianos and Naeem highlighted the fact that uncertainty over Brexit is contributing to a deteriorating macroeconomic backdrop in the UK, which could put upward pressure on spreads.
“Although we are modestly positive on the outlook for total returns in the sterling corporate bond market, we acknowledge that the UK macroeconomic backdrop has shown signs of deteriorating, largely due to Brexit uncertainty,” they said. “This dynamic may feed through to corporate health if the UK falls into a recession over the next few months.”
JPM Sterling Corporate Bond has a 0.68 per cent OCF and is yielding 2.37 per cent.
L&G Short Dated Sterling Corporate Bond Index
The second IA Sterling Corporate Bond fund that financial advisers suggest could be suitable for investors of most ages is L&G Short Dated Sterling Corporate Bond Index, which is overseen by Legal & General Investment Management’s index fund management team.
Since launch in May 2014, the £683.2m fund has made a 10.48 per cent total return; this puts it in the fourth quartile of the sector, in a period when long-dated funds have a decent run. Given its short-dated focus, the fund has also been one of the least volatile members of the peer group since launch and has posted its fourth lowest maximum drawdown.
In tracking the Markit iBoxx Sterling Corporates 1‑5 index, the fund has 42 per cent of its assets in UK bonds with Barclays, Imperial Brands and Friends Life Group being its largest holdings. It also holds the likes of Deutsche Telekom, Wells Fargo and Bank of America among its top 10.
Performance of fund vs sector and index since launch
Source: FE Analytics
Square Mile has included the fund on its ‘Recommended’ list. The consultancy said: “We believe that Legal & General Investment Management have a strong commitment towards managing passive strategies.
“Our rating on this fund is based upon our opinion of the suitability of the index tracked, the management group's commitment to operating passive strategies, the size of the fund, the fund's cost and its good historic record of tracking the index.”
L&G Short Dated Sterling Corporate Bond Index has a 0.14 per cent OCF. It is yielding 2.20 per cent.
Jupiter Strategic Bond
Moving onto the IA Sterling Strategic Bond sector, Ariel Bezalel’s £3.9bn Jupiter Strategic Bond fund can be found in all three FE AFI portfolios. The fund holds an FE Crown Rating of three and Bezalel is an FE Alpha Manager.
Since launch in June 2008, the fund has made a total return of 112.65 per cent – making it the second highest returner of the peer group over this time frame. However, it falls into the second quartile over three years and the third quartile over five years.
The fund has the aim of generating a high income with the prospect of capital growth, through the best opportunities in global fixed income markets. Bezalel’s process places macroeconomic analysis at its heart and he examines factors such as the economic cycle, global monetary policy and money supply before he decides where to invest.
Performance of fund vs sector over 5yrs
Source: FE Analytics
In his 2018 outlook, Bezalel said caution is “sensible” at the moment and noted that he had been increasing the quality of bonds in his portfolio, while reducing exposure to high yield. However, he has also been investing in some “bright spots” in emerging market debt as well as number of special situations.
“With the Fed and other central banks around the world seeking to remove the proverbial punch bowl of liquidity and, with valuations across most risk assets – such as corporate bonds and equities – at record highs, 2018 could be a challenging and volatile year for investors,” he added.
Jupiter Strategic Bond has a 0.73 per cent OCF and yields 3.40 per cent.
TwentyFour Dynamic Bond
The final fixed income fund that is in each of the FE AFI aggressive, balanced and cautious indices is TwentyFour Dynamic Bond. The £1.6bn fund resides in the IA Sterling Strategic Bond sector and holds five FE Crowns.
It is managed by TwentyFour Asset Management founding partner and chief executive Gary Kirk, who runs the portfolio alongside Eoin Walsh, Mark Holman, Felipe Villarroel, Pierre Beniguel and Robert Arnold.
Each member of the team tends to have their own specialism, although they are also expected to be generalists. Managing the portfolio with an absolute return mentality, the managers carry out research across the fixed income universe and have a wider scope than many of their peers.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
According to its most recent update, just under 24 per cent of the portfolio is in bonds issued by banks with another 15.6 per cent in government debt. It also has 12.2 per cent in European high yield, 11.7 per cent in insurance and 10.1 per cent in emerging markets.
“Valuations are clearly approaching ‘end-of-cycle’ levels but the supportive backdrop and positive technicals point to a continuation of the recent steady performance for credit spread products. That said, there are some uncertainties that keep the portfolio managers focused on a more prudent approach,” the managers said.
“The Italian general election has been set for 4 March and European market participants are likely to become more focused on this potentially critical vote once trading in 2018 commences. In addition, the German government needs to be confirmed or a new election will also be on the agenda, potentially increasing market volatility.”
TwentyFour Dynamic Bond has a 0.77 per cent OCF and is yielding 4.53 per cent.