The fixed income space is a far-reaching one for investors to navigate. Fixed income funds can offer exposure to a wide range of areas and can be useful tools for an investment portfolio.
Here we look at some bond funds with a Morningstar Analyst Rating in alternative areas of the market:
Royal London Ethical Bond
The Royal London Ethical Bond fund is an option for investors wanting fixed income exposure while ruling out the debt of companies which don’t meet certain ethical criteria. The Bronze-Rated fund, which has been managed by Eric Holt since 2009, rules out bonds issued by firms with significant involvement in alcohol, arms, gambling, tobacco and pornography as well as those with poor human rights records or involvement in animal testing. Holt also takes the macro environment into account in his investment decisions, identifying the most attractive markets in which to invest before picking out the individual companies within them.
Morningstar analyst Louise Babin says: “Performance over Holt’s tenure has been strong, ahead of the Markit iBoxx GBP Non-Gilts Index and its category. That’s encouraging as it shows the fund’s ethical exclusives have not caused it to miss out on performance.”
Year to date the fund has returned 4%, slightly behind its category, but has outperformed over three, five and 10 years. Over 10 years it has delivered annualised returns of 6.22%, some 0.36 percentage points ahead of the GBP Corporate Bond category.
The portfolio is spread widely, with some 379 holdings; among the largest positions are bonds issued by utilities firms Thames Water and Electricite de France (EDF), insurers Aviva and Prudential and social housing outfit Place for People. Worth noting is that around 10% of the portfolio is unrated bonds, a higher weighting than many of its peers. Babin says: “This is a drag on the liquidity profile of the fund and limits our view for the Process Pillar to Neutral.”
Jupiter Strategic Bond
The Gold-Rated Jupiter Strategic Bond fund is a behemoth in its category, with more than £4.3 billion of assets under management. Managed by Ariel Bezalel since 2008, the clean share class was upgraded to the highest rating this summer on the back of the “continuity in the execution of its flexible investment process, and strong absolute and risk-adjusted returns since inception”.
Bezalel is supported by a team of 14 sector-focused analysts in the running of the fund, using external research to help inform the fund’s macro view. The team use a barbell approach to balance capital preservation and income generation, mixing investments in high-quality government bonds and high-yield debt to achieve this.
Morningstar analyst Evangelia Gkeka says: “Each analyst is responsible for fundamental research, recommendation and monitoring of any relevant credit-related events. Decisions are discussed, challenged and made on the desk, which in our view enhances efficiency.”
The fund has returned 4.73% year to date, some 1.85 percentage points ahead of its Global Flexible Bond GBP Hedged Category. Over the past decade is has delivered annualised returns of 5.68%, some 1.39 percentage points ahead of its peers. Government bonds are the largest positions in the portfolio currently, including bonds issued by the US and Australia.
Gkeka adds: “The fund comfortable outperformed its Morningstar Category peers from July 2008 to June 2020 and also significantly outperformed its benchmark. The balanced approach to portfolio construction has been key to containing downside risk and, at the same time, keeping up with market rallies.”
M&G Global Floating Rate High Yield
For investors concerned that interest rates may rise in the future, the M&G Global Floating Rate High Yield Fund could be a worthwhile addition to a portfolio. Morningstar’s Babin describes the fund as “unique within its peer group”, as manager James Tomlins aims to deliver high-yield bond exposure without interest rate risk.
Floating rate bonds have variable interest rates – think of that a bit like a tracker mortgage whose rate rises in line with inflation rather than being set for the duration of the mortgage. Rather than having a fixed coupon, Babin says, the bonds in the portfolio “reset periodically in line with a money market reference rate”. She adds: “Tomlins looks to add value through sector and security selection.”
Year to date the fund has lagged its peer group - down 6.25% it is 4.46 percentage points behind the Global High Yield Bond GBP Hedged Category. Over five years it has produced annualised returns of 1.6%, some 2.28 percentage points behind its peers. Current holdings include US Treasuries as well as corporate bonds issued by French food company Picard Groupe, Danish parking firm Q-Park, and vending machine operator Evoca.
Babin says: “Tomlins is backed by deputy manager Stefan Isaacs and the two have established a good track record together. We believe Tomlins’ bottom-up credit selection complement Isaacs’ focus on top-down elements such as asset allocation and duration. We also appreciate that Tomlins is personally invested in the fund.”
However, Babin points out that the fund’s large size – assets under management peaked at $5.5 billion – means it can’t always be nimble and adds that fees are higher than many of its peers, which limits its rating to Bronze.
