Bonds have roared back into relevance over the past year after rising interest rates made yields more attractive than they have been for more than a decade. However, rising yields means falling prices, which has caused many to deliver losses over the short term.
Investors may be thinking now is a good time to invest, especially if central banks hit the pause button on rate rises on the back of slowing inflation and anaemic economic growth.
But nothing is guaranteed. Analysts are mixed on whether there will be a return to the regime of the past decade (lower rates for longer) or if the new era of rising rates will continue.
Richard Flynn, UK managing director at Charles Schwab, said the upcoming expected rate hike by the Federal Reserve will be the last in the current cycle, with the central bank more cautious from here.
Blerina Uruci, chief US economist at T. Rowe Price, noted that the Fed will not be able to cut rates this year, but analysts at DWS Group said some investors are preparing for a reversal in interest rate policy as early as September.
With so much uncertainty, investors may want to hedge their bets, picking funds that thrived in both environments. Below, therefore, Trustnet looks at the portfolios that have been in the top quartile of the IA Sterling Strategic Bond, Corporate Bond and High Yield Bond sectors over one and 10 years.
The former represents a world of rising rates and inflation, while the latter smooths this out, with the majority of the decade dominated by historically low rates.
There were no funds in the IA Sterling High Yield sector to crack the list, but there were entrants from the remaining two sectors.
Starting with IA Sterling Strategic Bond, three portfolios have made top-quartile returns over both one and 10 years.
The top performer over the past decade has been the £790m Artemis High Income fund run by FE fundinfo Alpha Manager Ed Legget, David Ennett and Jack Holmes.
Source: FE Analytics
Up 42.1% over 10 years, the fund is the only one of the three to make a loss over 12 months, although it has still beaten the majority of its peers.
Included in Hargreaves Lansdown’s Wealth List – the best-buy list of the UK’s largest fund shop – senior investment analyst Hal Cook said: “The fund could be a good way to diversify a conservative bond portfolio, or a more adventurous shares portfolio seeking exposure to other asset classes.”
The managers identify bonds offering attractive yields while trading at low valuations from companies they believe will be able to service their debts and pay bondholders. They can invest up to 20% in equities, with 15.6% currently invested in the stock market.
Total return of funds vs sector over 10yrs
Source: FE Analytics
The largest of the funds on the list is Pimco GIS Income managed by Daniel J. Ivascyn, Joshua Anderson and Alfred T. Murata, with more than £50bn in assets under management.
It has been the best performer of the trio over one year, up 0.7%, while it has made 34% over the past decade. BNY Mellon Inflation Linked Corporate Bond rounds out the trio.
Turning to the IA Sterling Corporate Bond sector, the £1.2bn M&G Strategic Corporate Bond fund run by Alpha Manager Richard Woolnough and Ben Lord is the larger of the two that made the cut.
Analysts at Square Mile rated the fund an ‘A’ and said it is suitable for investors who are looking for a secure source of income, higher than that available by investing in UK government bonds, with less capital volatility than that normally associated with the investment grade corporate bond market.
They noted the experience of Woolnough as a particular draw, as well as the process of using macroeconomic views to inform investments, which leads to a portfolio that is quite different from the benchmark.
Analysts at FE Investments also rated M&G Strategic Corporate Bond, but noted that “it is a fund most suitable for those who believe that the US and UK economies are likely to remain strong in the coming months and years,” given the fund managers’ current views.
Total return of funds vs sector over 10yrs
Source: FE Analytics
The other fund to achieve top-quartile returns over one and 10 years is L&G Active Short Dated Sterling Corporate Bond, managed by Mark Benstead and James MacIntyre-Ure.
As the name suggests, the portfolio predominantly buys bonds with less than five years to maturity, which tend to be less affected in the short term by rising interest rates.
This has helped over the past 12 months, with the fund down 3.2%, less than half that of the 6.6% loss for the IA Sterling Corporate Bond sector average.
Previously in this series we have also looked at small-caps, income funds, UK specialists, broad global strategies, Asia portfolios and multi-asset ranges.