Earlier this week FE Trustnet looked at some alternatives to bond funds in more specialised sectors.
Another option is to go to the higher-yielding funds in the mainstream bond sectors, although some advisers warn that this can be risky, as often the highest-yielding funds are taking the biggest risks.
AWD Chase de Vere’s Patrick Connolly said: "We prefer to look at asset allocation first, then if the income isn’t sufficient, to look for capital withdrawals."
However, there are some high yield bond funds for which a case can be made.
IMA Sterling Strategic Bond
The highest yield currently available in this sector, which is the most flexible in the assets it allows managers to invest in, is the 7.1 per cent provided by the Legg Mason Income Optimiser fund.
The £22.3m fund does not have a three-year track record yet, which may be one reason why it has not received much attention from investors.
The fund is managed by Brandywine Global Asset Management for Legg Mason.
It focuses on high yield corporates with some exotic sovereign debt such as that of South Africa and Turkey.
It also has almost six per cent in asset-backed securities, which have become increasingly popular in recent months among multi-managers looking to maintain their yield.
Highest-yielding funds: Sterling Strategic Bond
| Name | FE Crown Fund Rating | FE Alpha Manager Rated | Yield |
|---|---|---|---|
| Legg Mason Income Optimiser | Insufficient history | 0 | 7.1 |
| Royal London Sterling Extra Yield Bond | 5 | 0 | 6.82 |
| SJP Corporate Bond | 2 | 0 | 6.8 |
| PFS TwentyFour Dynamic Bond | Insufficient history | 0 | 6.61 |
| Premier Strategic High Income Bond | 1 | 0 | 6.47 |
Source: FE Analytics
These assets are also bought by the Royal London Sterling Extra Yield Bond fund, which has received rave reviews in recent months.
Richard Troue, investment analyst at Hargreaves Lansdown, says that it is his preferred fund in the sector.
"What it has been investing in over the last couple of years is asset-backed stuff, mortgage-backed bonds and quite a bit of non-rated stuff."
The fund has 35.2 per cent in unrated debt, but Troue says that this is not something to be concerned about.
"It’s not that they are risky, but that the issuer hasn’t paid for a credit rating."
The £112.3m PFS TwentyFour Dynamic Bond fund, currently yielding 6.61 per cent, is also heavily invested in asset-backed securities, which make up 21.3 per cent of its portfolio.
IMA Sterling High Yield Bond
The highest-yielding fund in this sector is the £55m Marlborough High Yield Fixed Interest fund, run by Paul Reed and Mark Sanders, which currently pays 8.91 per cent.
However, the fund has performed relatively poorly in total return terms, making just 36.03 per cent over five years, putting it in the bottom quartile of the sector.
Highest-yielding funds: High Yield Bond
| Name | FE Crown Fund Rating | FE Alpha Manager Rated | Yield |
|---|---|---|---|
| Marlborough High Yield Fixed Interest |
2 | 0 | 8.94 |
| Aberdeen High Yield Bond |
Insufficient history | 0 | 8.5 |
| Threadneedle High Yield Bond | 2 | 0 | 7.4 |
| Newton Global High Yield Bond | 2 | 0 | 7.23 |
| Investec Monthly High Income | 2 | 0 | 6.78 |
Source: FE Analytics
Second place goes to the Aberdeen High Yield Bond fund, which is currently yielding 8.5 per cent.
Troue says that he rates the management team, but that because it was only launched in March 2011, it does not have the track record of his preferred funds in the sector.
However, it is a top-quartile performer over the past year, with returns of 16.4 per cent compared with the sector’s 14.3 per cent.
Newton Global High Yield Bond has the best total return record on the list: it is a top-quartile performer over one year and five years.
The £154m fund is run by Parmeshwar Chadha and is currently yielding 7.22 per cent.
IMA Sterling Corporate Bond
Funds in the IMA Corporate Bond sector have lower yields than those on offer in the other two areas.
This is because they do not have the flexibility of the other sectors, and must have at least 80 per cent of their assets in bonds rated BBB- or higher, cutting out the higher-yielding part of the market.
Highest-yielding funds: Corporate Bond
| Name | FE Crown Fund Rating | FE Alpha Manager Rated | Yield |
|---|---|---|---|
| Alliance Trust - Monthly Income Bond | Insufficient history | 0 | 5.53 |
| Schroder - Corporate Bond |
1 | 0 | 5.23 |
| Rathbone - Ethical Bond |
4 | 0 | 5.1 |
| Cazenove - UK Corporate Bond | 3 | 1 | 4.9 |
| Premier - Corporate Bond Monthly Income | 3 | 0 | 4.88 |
| WDB - Fixed Income | 3 | 0 | 4.87 |
Source: FE Analytics
This does, however, mean they should be taking on less risk.
The highest yield is on offer from the Alliance Trust Monthly Income Bond fund, which stands at 5.53 per cent.
This is another relatively new fund, having been launched in 2010.
Run by Stuart Steven and Stuart McMaster, the £330m fund is top quartile over the past year.
The 5.1 per cent on offer from the Rathbone Ethical Bond fund, managed by Bryn Jones, is the second-highest figure in the sector.
The Rathbones fund is a second-quartile performer over one, three and five years, meaning its track record is the strongest on the list.
This is despite the ethical criteria that the fund has to meet.
Connolly says he prefers FE Alpha Manager Richard Woolnough’s £6bn M&G Corporate Bond fund, which is currently yielding only 3.15 per cent, saying that a proven management team is more important than a headline yield.