Many market commentators and experts have raised concerns that a number of bond funds have become too large. Their main worry is that as bond yields gradually rise in the future, a number of managers will be stuck with overpriced assets if liquidity dries up.
Although all bond funds would be hit by a sell-off in the asset class, some experts say that if prices were to fall, managers of multi-billion pound portfolios would be worse off as it would take a lot longer for them to find buyers for their assets.
FE Alpha Manager Richard Woolnough added to these concerns when he stated that the sheer size of his £15.8bn M&G Optimal Income fund was affecting his day-to-day portfolio management.
With that in mind, FE Trustnet highlights five bond funds that are not only small in comparison to their peers, but that have the flexibility to dip into all areas of the fixed income market for protection and capital growth.
We looked for funds under £250m in size with a record of producing top-quartile returns.
TwentyFour Dynamic Bond
The five crown-rated TwentyFour Dynamic Bond fund has been one of the best-performing strategic bond funds since launch in April 2010, however it only has £131m of assets under management.
It is headed up by the management team of Gary Kirk, Ben Hayward, Eoin Walsh and Rob Ford.
The fund is highly flexible and in particular makes use of its ability to buy asset-backed securities, which make up 20 per cent of the fund.
According to FE Analytics, the TwentyFour Dynamic Bond fund is a top-quartile performer in the IMA Sterling Strategic Bond sector over three years, with returns of 20.26 per cent, comfortably beating its LIBOR GBP3m index benchmark.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
It boasts top-quartile returns over one year and has weathered the recent volatility more effectively than the majority of its competitors, sitting in the top quartile of its sector over one, six and three months.
The TwentyFour fund has an attractive yield of 6.61 per cent, despite the fact it has minimal exposure to low-rated CCC and CC credit. BBB and BB bonds make up nearly 70 per cent of the fund.
TwentyFour Dynamic Bond has an ongoing charges figure (OCF) of 1.41 per cent and requires a minimum investment of £1,000.
Standard Life Strategic Bond
The £106.1m Standard Life Strategic Bond fund has been managed by Andrew Sutherland, who is the group’s head of credit, since its launch in February 2009.
Our data shows that the fund is a top-quartile performer in the IMA Sterling Strategic Bond sector over one and three years. It is also a top-quartile performer in 2013, with returns of 2.6 per cent.
It has a lower yield than the TwentyFour Dynamic Bond portfolio, at 3.01 per cent.
Although Sutherland favours lower-rated credit, with 46.6 per cent weighted in corporate high yield, he still has 24.8 per cent and 27.4 per cent in investment grade corporate and investment grade sovereigns, respectively.
Sutherland’s government bond exposure includes debt issued by Norway, Canada and the UK.
The manager says he has also reduced the fund’s duration as he feels it is necessary to protect it from rising interest rates. Standard Life Strategic Bond has an OCF of 1.37 per cent and requires a minimum investment of £1,000.
AXA Framlington Managed Income
George Luckraft’s five crown-rated AXA Framlington Managed Income fund has just £66.8m of assets under management.
Although the fund, which has a yield of 5.16 per cent, has delivered fairly ordinary returns compared with the other members of the IMA Sterling Strategic Bond sector over the long- and medium-term, its performance has picked up of late.
According to FE Analytics, the AXA Framlington Managed Income fund is a top-quartile performer over three years and is the third-best performer in the sector over one year, with returns of 15.23 per cent.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
Luckraft favours company debt over sovereigns, with corporate bonds making up 77.22 per cent of his portfolio while government bonds make up just 1.25 per cent.
The manager, unlike a lot of his peers in the sector, also uses his ability to allocate to equities. Shares make up 15.23 per cent of the fund, with Luckraft using both convertible and ordinary shares.
AXA Framlington Managed Income requires a minimum investment of £1,000 and has an OCF of 1.13 per cent.
F&C Strategic Bond
The £125m F&C Strategic Bond fund is the fifth-best performer in the IMA Sterling Strategic Bond sector over 10 years.
However, its current management team of Rebecca Seabrook and Keith Patton have taken over more recently: Seabrook began running the fund in November 2009. With returns of 29.5 per cent since then, it has outperformed the sector average.
The F&C Strategic Bond fund has beaten the sector average – which is also its benchmark – over one and three years, but has tended to be more volatile.
The fund has a yield of 4.7 per cent, and the managers count bonds issued by the likes of Tesco, BNP Paribas and RSA Insurance as top-10 holdings.
F&C Strategic Bond has an OCF of 1.2 per cent and requires a minimum investment of £1,000.
Old Mutual Monthly Income Bond
The £41m Old Mutual Monthly Income Bond fund, which is managed by Christine Johnson, is the smallest of the five funds highlighted here.
In terms of performance, it has underperformed the IMA Sterling Strategic Bond sector since its launch in 2004, though since Johnson took over in September 2010 those returns have improved somewhat.
It has beaten the sector over three years and is top quartile over 12 months. The fund has also been top quartile year-to-date with returns of 2.51 per cent, though as the graph shows, the fund was hit harder than most during the June sell-off.
Performance of fund vs sector year to date
Source: FE Analytics
The Old Mutual Monthly Income Bond fund has a yield of 4.9 per cent.
In her most recent note to her investors, Johnson said that protecting the portfolio from rising yields is the most important aim in the current environment. Because of that, the manager has upped her exposure to shorter-dated debt and the fund’s average duration is now just 2.8 years.
The fund has just 0.1 per cent in government bonds; 5.9 per cent is in cash.
Old Mutual Monthly Income Bond has an OCF of 1.46 per cent and requires a minimum investment of £1,000.
