Royal London Sterling Extra Yield Bond is the most consistent IA Sterling Strategic Bond fund of the past decade, beating its sector average in each of the past 10 calendar years.
Of the 41 funds with a track record long enough to be included in the study, another two funds – Artemis High Income and Baillie Gifford Strategic Bond – beat their average peer in nine of the past 10 years, while four managed it in eight.
Performance of funds and sector
Source: FE Analytics
Royal London Sterling Extra Yield Bond is a value-oriented bond fund that aims to exploit credit market inefficiencies by investing in a combination of investment grade, sub-investment grade and unrated bonds.
It targets a yield of 1.25 times that of the FTSE Actuaries British Government 15 Year index, although the fund itself is not benchmark constrained.
Royal London Asset Management said FE Alpha Manager Eric Holt uses his vast experience – he has headed up the fund since 2003 – to invest in a broader credit universe than many of his peers, enabling him to source bonds with strong covenants and that are usually secured – that is to say backed by a charge on specific assets.
In an article published on FE Trustnet in January, The Share Centre junior analyst Thomas Rosser named Royal London Sterling Extra Yield Bond as a fund to keep an eye on this year.
“A highly diversified portfolio that focuses on bonds supported by stable income streams and structural enhancements, this fund should be somewhat protected in times of market turbulence,” he said.
“In recent months, uncertainty surrounding economic growth and low interest rates has highlighted income-generating assets as an attractive proposition. The manager of this fund has over 35 years’ experience and is well seasoned to deal with market fluctuations and interest rate risk.”
In his most recent note to investors, Holt said: “We continue to believe that portfolio diversification is important and a focus on bonds supported by stable income streams and structural enhancements should provide protection in times of market turbulence.
“We consider that the current credit spread is attractive and offers significant compensation for default and other risks (for example liquidity and rating migration). We expect investment grade credit bonds will outperform UK government securities over the next three years.”
Data from FE Analytics shows Royal London Sterling Extra Yield Bond has made 204.18 per cent over the 10-year period in question, compared with 96.08 per cent from the FTSE Actuaries British Government Over 15 Years index and 82.29 per cent from its IA Sterling Strategic Bond sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
However, it is worth pointing out that the fund is essentially a high-yield bond strategy and can be riskier than its average peer because of this. FE Analytics shows it has posted a maximum loss of 11.05 per cent in the past decade, which is the highest in the peer group.
The fund is yielding 5.76 per cent; a £10,000 lump sum invested into it at the start of 2009 would have delivered £9,345.21 in income alone over this time. It is £1.8bn in size and has ongoing charges of 0.83 per cent.
While Artemis High Income doesn’t have Royal London Sterling Extra Yield Bond’s 100 per cent track record of sector outperformance over the past decade, it delivered a much higher total return over this time, at 363.16 per cent.
This fund invests at least 80 per cent of its assets in bonds, split between government bonds and a mixture of high-quality corporate debt and riskier, high-yielding debt, with the remainder in equities or cash. Alex Ralph has responsibility for the debt part of the portfolio, with Adrian Frost and the equity income team covering stocks.
FE Invest said the team focuses on companies’ cash generation to understand the sustainability of coupon- and dividend-payments.
“In the bond portfolio, Ralph looks for market-leading companies with improving balance sheets,” it added. “The focus is on stockpicking and the analysis of companies rather than macroeconomic analysis and anticipating movements in interest rates.”
FE’s analysts also said that this fund could be suitable for investors looking for a high income and who understand it is necessary to take more risks to obtain it: “To obtain a higher yield, the managers buy lots of higher-yielding bonds; this exposes them to credit risk, which is historically more correlated to equities. For this reason, the fund does not suit those looking for a bond fund to diversify away from equities.”
Artemis High Income is currently yielding 5.45 per cent. Someone who invested a £10,000 lump sum into the fund at the start of 2009 would have received £12,553.62 in income alone over this time.
Baillie Gifford Strategic Bond aims to deliver a monthly income through holding investment grade and sub investment grade bonds across the rating spectrum.
Its managers, Torcail Stewart and Lesley Dunn, believe corporate bond markets are inefficient and often fail to reflect all relevant information. This, combined with the segmented nature of the markets, frequently causes bonds to move away from their fair valuations, creating opportunities for investors who can analyse the relevant information and take advantage of such mispricings.
The team at Square Mile Investment Consulting & Research said that due to the process used, the fund may perform in a way which is significantly different to both the peer group and the benchmark.
“The focus on identifying and investing in undervalued securities means that performance can be somewhat more volatile than other funds investing in similar instruments, with the fund tending to underperform in a falling market and outperform in a rising market,” it said.
Square Mile added that the fund would be most suitable for investors who are looking for a level of income higher than that on comparable investment grade bonds, with the potential for some capital growth, and who are prepared to hold the fund over at least one full market cycle.
Baillie Gifford Strategic Bond has made 144.69 per cent over the 10-year period in question. It is yielding 3.6 per cent; a £10,000 lump sum invested into the fund at the start of 2009 would have delivered £5,946.76 in income alone over this time.
Performance of funds vs sector over 10yrs
Source: FE Analytics
It is £827m in size and has ongoing charges of 0.52 per cent.