Almost half of the top quartile funds over the past five years in the IA Sterling Corporate Bond sector have dropped to the bottom of the bottom of the performance table in 2018, according to research by FE Trustnet.
Having previously considered UK, international equity and multi-asset funds that got off to a bad start in 2018 despite performing well during the previous five-year period, FE Trustnet has now turned its attention to the Investment Association’s fixed income sectors.
While the worst of the top performers so far have come from the IA Sterling Corporate Bond sector – where 47 per cent have seen performance dip – the IA Global Bond and IA Global Emerging Market Bond sectors, the most resilient fixed income strategies can be found in the IA Sterling High Yield, where just 14 per cent of the funds that are top-quartile over five years have fallen into the bottom quartile in 2018.
For this article, we filtered the entire Investment Association universe to find out which bond funds have been in their sector’s bottom quartile during the first five months of 2018 but were top quartile during the five years to end-2017.
Although it is worth bearing in mind that there are still just over six months of the year remaining and some may yet turn the tables.
Source: FE Analytics
As the above table shows, most of the top long-term fixed income funds that are bottom quartile today have lost investors’ money, with only one fund having delivered a positive return so far in 2018.
The $1.74bn Fidelity Emerging Market Debt – overseen by Eric Wong and Steve Ellis – is the worst performer with a 6.68 per cent loss for the year to 31 May 2018.
The fund was top quartile over the five years to end-2017 though, delivering a 45.12 per cent return compared with a 16.67 per cent gain for the average fund in the IA Global Emerging Market Bond sector.
Another fund from the IA Global Emerging Markets Bond sector tops the table of those that have had a weak start to 2018, the $295m Invesco Emerging Markets bond.
The fund is down 4.36 per cent so far in 2018, despite having delivered a 47.1 per cent total return over the five years to end-2017.
Invesco Emerging Markets Bond – run by Rashique Rahman, Avi Hooper, Michael Hyman and Robert Turner – aims to achieve a high level of income together with long-term capital growth.
It has a 48.8 per cent weighting to sovereign debt and has Turkey, Argentina and Mexico among its top geographical weightings.
The €6.1bn GAM Star Credit Opportunities EUR overseen by FE Alpha Manager Anthony Smouha alongside Gregoire Mivelaz, has also made it onto our list of long-term outperformers struggling in 2018.
Despite having a weak start to 2018 with a 4.09 per cent loss compared with a 1.15 per cent loss for the average fund in the IA Global Bonds sector, the five FE Crown-rated fund is one of the IA Global Bond funds that have given investors a particularly good ride over the past five years, FE Trustnet research recently showed.
YTD performance of fund until May 2018
Source: FE Analytics
As our research showed, almost half of the top long-term performing funds in the IA Sterling Corporate Bond sector have dropped to the bottom of the performance table during 2018, although posting more moderate losses than their global or emerging markets peers.
The five FE Crown-rated Janus Henderson Preference & Bond is one of them. Despite having delivered a 31.27 per cent return compared with a 22.98 per cent gain for the average fund in the IA Sterling Corporate Bond sector over the five years to end-2017, the fund is down 2.05 per cent.
The £808.1m fund is overseen by FE Alpha Manager Jenna Barnard alongside John Pattullo, who manage the fund with a specific focus on income while preserving investors’ capital.
According to Square Mile Investment Consulting & Research, the fund – which can also invest in preference shares – tends focus more on corporate bonds and is therefore likely to perform strongly when bond markets are rising.
There were also a number of large fixed income funds that are top performers over five years but are struggling in 2018 as well as the GAM Star Credit Opportunities EUR fund such as Schroder ISF EURO Corporate Bond.
The €8.9bn fund has recorded a 2.25 per cent loss for the year to 31 May 2018 compared with a 1.15 per cent loss for the IA Global bonds sector.
Schroder ISF EURO Corporate Bond is run by Patrick Vogel and aims to provide capital growth and income by investing in bonds denominated in euro issued by companies worldwide.
Vogel runs the strategy alongside Schroders’ credit team and uses a thematic approach for idea generation, a strategy that has been in place since Vogel took over in 2012. The fund has outpaced its benchmark, the BofA Merrill Lynch Euro Corporate Index since then.
Performance of fund until end of May
Source: FE Analytics
Over the five years to end 2017, Schroder ISF EURO Corporate Bond delivered a 40.34 per cent total return compared with a 20.82 per cent gain for the average fund in the IA Global Bonds sector and a 29.57 per cent gain for the BofA Merrill Lynch Euro Corp index.
Another example of a large underperforming fund is the four FE Crown-rated £4.1bn Morgan Stanley Euro Corporate Bond fund. managed by Richard Ford and FE Alpha Manager Leon Grenyer, which has lost 2.59 per cent so far this year compared with a 35.7 per cent gain over five years to end-2017.