This has led to problems for fixed interest investors, who are traditionally cautious and so may not feel comfortable trusting their money to a fund that isn't tried and tested. This, combined with record-low bond yields, has put many fixed interest investors unsure of where to turn to next for income.
For such investors, Bestinvest’s Jason Hollands and head of FE Research Rob Gleeson recommend five high-yielding fixed income portfolios as alternatives to the giants.
Henderson Sterling Bond
Gleeson (pictured) tips the five crown-rated Henderson Sterling Bond fund in the FE Select 100.
The fund has just £514.7m in assets under management and is yielding 3.2 per cent.
FE Alpha Managers Stephen Thariyan and Philip Payne took over the portfolio in April 2009, since which time it has returned 115.41 per cent compared with 57.82 per cent from the IMA Sterling Corporate Bond sector, according to FE Analytics.
Performance of fund vs index since Apr 2009
Source: FE Analytics
"In April 2009, Thariyan and Payne inherited a fund that had suffered from heavy losses and outflows due to an overweight position in bonds issued by banks and other financial institutions," Gleeson said.
"The fund made back most of its losses in 2009 thanks to the market rebound and good portfolio management."
The managers have since pulled away from such a high weighting to financial debt, although bonds from Barclays and HSBC both feature in its top-10.
US pharmaceutical giant Pfizer, US retailer Wal-Mart and British blue chip tobacco firm Imperial Tobacco are also part of the team’s top-holdings.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.45 per cent.
Artemis High Income
The £654.2m, four crown-rated Artemis High Income fund has a yield of 6 per cent, the sixth-highest figure in the IMA Sterling Strategic Bond sector.
It is managed by FE Alpha Manager duo Adrian Frost and Adrian Gosden, who also head up the outperforming Artemis Income fund.
"The fund’s strong outperformance in 2012 led to it being added to the FE Select 100," Gleeson said.
"With investors struggling to find income that year, the managers raised the already significant exposure in the fund to high yield corporate bonds. This demonstrates its riskier approach compared with its peers."
The fund has beaten the sector over one, three, five and 10 years.
Over the last decade, it has made 96.56 per cent, nearly double the returns of its peers.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.32 per cent.
Invesco Perpetual Distribution
"A more traditional alternative for an investor disinclined to make a full-shift from bonds into equities would be a hybrid balanced fund," Hollands said.
"Invesco Perpetual Distribution combines the skills of Paul Causer and Paul Read on the fixed income portfolio with Neil Woodford on the equities sub-portfolio, together generating a respectable 4.5 per cent yield."
The five crown-rated fund is larger than the others on this list, at £2.3bn, but with a blend of equities and fixed income is not likely to have the liquidity issues of straight bond funds.
It is a top-quartile performer in the IMA Mixed Investment 20%-60% Shares sector over one, three and five years.
Since launch in February 2004, the fund has gained 78.75 per cent, compared with 34.8 per cent from the sector.
Performance of fund vs sector since launch
Source: FE Analytics
It requires a minimum investment of £500 and has ongoing charges of 1.56 per cent.
TwentyFour Dynamic Bond
For investors who are not ready to shift into equities, but want a higher yield from their fixed income funds, Hollands recommends TwentyFour Dynamic Bond.
"The team at TwentyFour come predominantly from investment banking backgrounds, including Citi Alternatives and Barclays Capital, combining both trading skills and portfolio management expertise," he said.
"Unlike your bog-standard strategic bond fund anchored around investment grade and high yield credits, this fund tends to use a wider range of instruments, including asset and mortgage backed securities, and it will also use derivatives to manage interest rate and credit risk."
The £116.3m fund has a yield of 6.86 per cent, the second-highest figure in the IMA Sterling Strategic Bond sector, behind only Legg Mason Income Optimiser.
Since launch in April 2010 the fund has gained 27.38 per cent, beating both the sector and Libor GBP 3m, which have made just 20.44 per cent and 1.31 per cent over this period respectively.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund requires a minimum investment of £1,000 and has low ongoing charges of 0.9 per cent.
Legg Mason Income Optimiser
This fund is suitable for investors who put income at the top of the list of their priorities: its yield of 7.1 per cent is the highest in its sector.
With just £24.4m in assets under management, it is certainly far from the constraints of a heavy-hitting fund, with strong performance to boot.
It has picked up 18.02 per cent since launch in December 2011, compared with 14.89 per cent from the IMA Sterling Strategic Bond sector.
Performance of fund vs sector since launch
Source: FE Analytics
The fund’s highest weighting is to Turkish short-dated debt. It is also invested in other sovereign debt including Mexico and South Africa, though the majority of the portfolio is invested in corporate bonds.
North America is the highest regional weighting in the portfolio, at 28.45 per cent.
Hollands points out the fund still has a short track record and says investors should be aware the management team uses a large exposure to emerging market debt to boost the yield.
The fund requires a minimum investment of £3,000 and has ongoing charges of 1.75 per cent.
