Artemis Strategic Bond, TwentyFour Dynamic Bond and Royal London Sterling Extra Yield Bond are three fund ideas recommended by Architas’ Adrian Lowcock for a rising rate environment. 
After years of stimulative monetary policy in the wake of the global financial crisis, central banks around the world have been preparing to remove quantitative easing (QE) measures and raise interest rates.
However, the Architas investment director (pictured) said investors should prepare for a new investment environment as central banks around the world signal their intentions to raise interest rates.
Lowcock said: “For the past 10 years central banks have been a strong tailwind supporting the bond market.
“The announcement last week by the US Federal Reserve means that has changed and the 30-year bull/bond market is coming to an end. Investors should expect bond yields to rise, which means prices fall.”
He added: “Investors need to review their existing bond investments and make sure they are still suitable for this new environment and make any changes before the market does it for them.
“There is plenty of choice and many bond funds have the flexibility and tools to provide investors with the income and capital return they seek.”
Below, Lowcock highlights three fund ideas from the IA Sterling Strategic Bond sector for investors to consider as rates rise.
Artemis Strategic Bond
The £1.2bn Artemis fund has been managed by James Foster and Alex Ralph since 2005 and targets a combination of income and capital growth.
Over three years the fund has returned 17.5 per cent compared with a 12.85 per cent gain for the average IA Sterling Strategic Bond member, as the chart below shows.
Performance of fund vs sector over 3yrs
Source: FE Analytics
“The fund can invest across the fixed income spectrum,” said Lowcock. “It is relatively unconstrained and the managers can take high conviction positions, with the portfolio featuring strong biases when the managers deem them appropriate.
“The managers assess top-down factors such as interest rates, inflation and credit quality to determine the fund's positioning; the wider economic outlook is a particular strength of Foster. This dictates the split among investment grade, high yield and gilts.”
He added: “They believe the best opportunities typically lie in high yield and their process often leads to a pronounced bias here. Within investment grade, sector analysis is key, as within industry sectors as they believe individual bonds are correlated.”
Lowcock director noted that the managers had moved to short German bunds and US treasuries in response to central banks’ willingness to raise rates.
Foster and Ralph said in their most recent factsheet: “The autumn will prove crucial as central banks determine whether stronger economic growth will lead to inflation and need some policy tightening or whether leaving the economy to run ‘hot’ is legitimate,” the managers noted in their most recent factsheet.
“Our view is that the European Central Bank will signal a reduction in its asset purchases and that the US Federal Reserve will start process of shrinking its balance sheet. This should lead bond yields to rise.”
Artemis Strategic Bond also features on the FE Invest Approved list, with FE analysts rating the managers and the firm’s ability in UK fixed income highly.
The fund has a distribution yield of 3.5 per cent and an ongoing charges figure (OCF) of 0.58 per cent.
TwentyFour Dynamic Bond
Lowcock’s second pick is the £1.6bn TwentyFour Dynamic Bond fund, which is team-managed by the boutique asset manager’s fixed income specialists.
“The investment committee establish the bigger picture view of the world leaving the managers to decide how and when to reflect this within the fund,” he said.
“The fund is unconstrained and can go anywhere in the fixed income space and as such could be considered a best ideas fund.”
Since launch in 2010 the fund has returned 60.6 per cent compared with a return of 45.03 per cent for the average peer, as the chart below shows.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
He said unlike its peers this fund has a higher exposure to asset-backed securities and tends to invest in a wider range of assets. As a result, Lowcock said the fund tends to be more volatile than its peers because it has greater exposure to more illiquid assets.
FE Analytics shows the fund has posted annualised volatility of 6.04 per cent since launch, compared with 3.90 per cent from its average peer. The maximum drawdown – or the most an investor would have lost if they bought and sold at the worst possible times – is 10.33 per cent; it is 3.72 for the average strategic bond fund.
TwentyFour Dynamic Bond has a distribution yield of 4.36 per cent and an OCF of 0.77 per cent.
Royal London Sterling Extra Yield Bond
Lastly, Lowcock highlighted the Royal London Sterling Extra Yield Bond, managed by Eric Holt since 2003.
The £1.7bn fund is run from a bottom-up perspective and aims to achieve a high level of income, defined as a gross redemption yield of 1.25 times the gross redemption yield of the FTSE Actuaries British Government 15-Year index.
Lowcock said Holt prefers to conduct his own fundamental analysis instead of relying on rating agencies to identify undervalued assets.
“There is a focus on un-rated investments which are often ignored by other managers and differentiates the fund to other UK corporate bond funds, but also means this fund is riskier and more akin to a high yield bond fund,” he said.
Over 10 years, the fund has returned 98.3 per cent compared with a return of 61.75 per cent for the average peer. It has underperformed the benchmark index, however, which is up by 126.76 per cent over the same period.
Performance of the fund vs sector & benchmark over 10yrs
Source: FE Analytics
As Lowcock noted, the fact that the fund focuses on riskier high yield bonds means that it can give investors a less smooth ride than its peers. Over 10 years, the fund’s annualised volatility has been 9.28 per cent (compared with 5.61 per cent for the sector) while its maximum drawdown of 43.60 per cent is the third highest of the peer group.
Royal London Sterling Extra Yield Bond has a distribution yield of 6.1 per cent and an OCF of 0.83 per cent.