Recent years have seen Rathbone Ethical Bond, BlackRock Corporate Bond and Liontrust Monthly Income Bond generate some of the IA Sterling Corporate Bond sector’s strongest risk and return numbers, research by FE Trustnet shows. 
Corporate bonds are a mainstay of investor portfolios and have enjoyed a strong run in the post-crisis period but the prospect of interest rate rises has cast somewhat of a shadow over the asset class – prompting some to review their exposure.
With this in mind and as part of an ongoing series, we have examined the IA Sterling Corporate Bond across 10 different metrics to see which funds have persistently been at the top of their peer group for both returns and risk.
To recap, we have ranked the peer group’s members for the average decile ranking of their five-year returns up to the end of 2017, the annual returns of 2017, 2016 and 2015, annualised volatility, alpha generation, Sharpe ratio, maximum drawdown and upside and downside capture relative to the sector average.
Performance of fund vs sector and index over 5yrs to the end of 2017
Source: FE Analytics
In first place is Bryn Jones’ £1.1bn Rathbone Ethical Bond fund, which has an average decile ranking of 2.7 and made a 39.77 per cent total return over the five years to the end of 2017; over the same period, its average peer was up 26.33 per cent.
The fund sits in the sector’s top decile for five-year total returns, performance in 2015 and 2017, alpha generation, Sharpe ratio and downside capture. It also holds four FE Crowns for strong performance when it comes to stockpicking, consistency of outperformance and achievement of results at a relatively low level of risk over recent years.
As its name suggests, the fund has an ethical element to it that means it looks for companies with progressive or well-developed practices and policies incorporating community investment, employment opportunities and human rights, while avoiding those in areas such as alcohol, animal testing and armaments.
FE Invest, which has Rathbone Ethical Bond on its Approved List, said: “The fixed income team of three, led by Bryn Jones, is combined with an ethical research team of four. Jones strongly believes that he can improve society through selective debt financing and, over its history, the fund has invested in many educational and social housing programmes. The impact of the ethical screening on bond selection has been positive on the fund’s performance.”
In second place – as revealed in the table below – is Ben Edwards’ £666.8m BlackRock Corporate Bond fund. This five FE Crown-rated fund has an average decile ranking of 2.9 thanks to top-decile numbers for its 2015 and 2017 total returns as well as alpha generation.
The fund is supported by a team of 13 credit analysts, who have on average 11 to 12 years of experience. The portfolio is built around a number of diversified trading strategies, such as single name ideas, traditional duration or regional positioning, sector plays or directional views and is able to carry out pair trades by being long of one credit and short another through credit default swaps.
Source: FE Analytics
Liontrust Monthly Income Bond and Kames Investment Grade Bond both scored 3.1 in this research but the Liontrust fund has edged into third place as it has a higher five-year total return.
Stuart Steven, Aitken Ross and Kenny Watson’s £291.5m Liontrust Monthly Income Bond fund, which made 33.15 per cent over the five years in question, uses a top-down and macro-orientated approach when determining its asset allocation. Bottom-up analysis is used when choosing securities and this includes consideration of environmental, social and governance (ESG) factors through Liontrust’s Sustainable Future Process.
Euan McNeil and Stephen Snowden’s £1.5bn Kames Investment Grade Bond, which had a 32.9 per cent total return over the five-year period, uses a high-conviction strategy based on the belief that fixed income markets are inefficient and looks to add value through six sources: interest rate risk, asset allocation, yield curve positioning, ratings selection, sector allocation and stock selection.
Turning to the largest members of the IA Sterling Corporate Bond sector and the £14bn Pimco GIS Global Investment Grade Credit fund is ranked in 39th place (out of 78) with an average decile ranking of 5.5. The fund’s score was brought down for ninth-decile numbers for five-year returns and Sharpe ratio, although it is in the second decile for alpha generation and annualised volatility.
Paul Causer and FE Alpha Manager Michael Matthews’ £4.6bn Invesco Perpetual Corporate Bond fund fared better as its 3.8 average decile ranking put it in 11th place, with top-decile results for 2015, alpha, annualised volatility, maximum drawdown and downside capture.
However, the £4.2bn Fidelity Moneybuilder Income fund is in 56th place with a 6.2 average decile ranking while M&G Corporate Bond’s score of 5 puts it in 28th place on the overall table.
Performance of fund vs sector and index over 5yrs to the end of 2017
Source: FE Analytics
At the very bottom of the table is the £40m Smith & Williamson Fixed Interest fund, which has an average decile ranking of 8.7. Tenth-decile results for five-year returns, performance in 2015, alpha generation, maximum drawdown and Sharpe ratio contributed to this score.
Joining the Smith & Williamson fund at the bottom of this research are Royal Bank of Scotland Extra Income (8.1 average decile ranking), Standard Life Investments Corporate Bond (7.9) and Scottish Widows Corporate Bond (7.7).