GAM Star Credit Opportunities, Artemis Strategic Bond and Baillie Gifford Corporate Bond are among the best performing fixed income funds chosen by FE Adviser Fund Index (AFI) panellists.
The popularity of fixed income as an asset class among investors seems to have dropped in recent years as concerns over high valuations dogged the sector.
Yields have fallen while, at the same times, prices have risen dramatically over the last decade, making bonds a good place to be for investors.
However, with indications that interest rates could be set to rise globally pushing bond yields higher, many investors and fund managers are starting to underweight the asset class.
Yet, there have been some good gains to be made for investors that back the right fixed income management teams.
Indeed, only five bond funds of an eligible 32 funds across the AFI Cautious, Balanced and Aggressive portfolio range have provided a negative return so far this year, while five have generated returns of more than 5 per cent.
Having previously considered the best-performing alternative equity strategies from the AFI panel, in this article FE Trustnet has explored some of the AFI panel’s best performing fixed income ideas.
The best performing fund in the adviser-backed fixed income bucket is the £846m GAM Star Credit Opportunities run by Anthony Smouha and Gregoire Mivelaz.
The fund aims to provide investors with a high income returnsthrough investment grade or high quality issuers, particularly in the financials sector. In order to do this the managers will look lower down the market capital structure.
In theory, there is a low level of default from these companies, therefore the lower-tiered debt is more secure than many believe.
The fund has been the best performer in the IA Sterling Strategic Bond sector over the last three and five years and is a top quartile performer over all recent time periods.
It has also been a top quartile performer in each calendar year since its launch in 2011 and so far this year has returned 10.94 per cent to investors, beating the sector average by 6.54 percentage points and the Bloomberg Barclays Sterling Aggregate Corporate index by 8.28 percentage points.
Performance of fund vs sector and benchmark YTD
Source: FE Analytics
In its latest factsheet, the managers noted: “We continue to monitor the possibility of rising generic interest rates.
“However, we also expect that the income offered by our portfolio with its blend of fixed-rate, fixed-to-floating bonds and discounted floating-rate notes will provide an attractive return as well as the potential for capital gains.”
The fund, which sits in both the AFI Balanced and Cautious portfolios, has a yield of 4.5 per cent and a clean ongoing charges figure (OCF) of 1.17 per cent.
The second best performing fund from the panel’s bond picks is the £1.5bn TwentyFour Dynamic Bond, which is a constituent of all three AFI portfolios.
The fund is managed by a team of six fund managers that use a highly flexible approach to take advantage of changing market conditions and achieve long term income and capital growth.
An investment committee draws up the top-down market allocations and views before the managers, who have specialisms across the fixed income spectrum, determine which investments are most suitable.
The fund has a credit spread duration of 2.98 years with its largest geographical weighting in the UK at 34.33 per cent followed by continental Europe at 28.29 per cent and North America at 18.69 per cent.
TwentyFour Dynamic Bond has been a top quartile performer in the IA Sterling Strategic Bond sector over one and five years, and is a second quartile performer over three years.
So far in 2017, the fund has returned 7.49 per cent to investors, 3.22 percentage points ahead of the sector and 7.24 percentage points ahead of its Libor benchmark.
It has done so with below average monthly volatility of 1.75 per cent, and so far this year has not made a loss in any monthly period.
The fund has a yield of 4.76 per cent and an OCF of 0.77 per cent.
The third best performer of the AFI panellists’ bond fund picks is the £1.1bn Artemis Strategic Bond run by Alex Ralph and James Foster.
The fund has returned 6.1 per cent to investors in 2017, beating the IA Sterling Strategic Bond sector average by 1.81 percentage points.
Performance of fund vs sector YTD
Source: FE Analytics
“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 wrote in the fund’s latest 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.
“We have been less involved in the primary markets given the rich valuations of new issues. Instead, we have been adding to existing issues over the month, in particular Swiss Re, RBS and XL. We have reduced the position in Barclays.”
The fund, which sits in both the AFI Balanced and Cautious portfolios, has a yield of 3.86 per cent and an OCF of 0.58 per cent.
Baillie Gifford Corporate Bond
Next up is the £699m Baillie Gifford Corporate Bond run by Stephen Rodger since 2000 who was joined by co-manager Torcail Stewart in 2010.
The fund aims to provide investors with a monthly income and invests in a range of bonds across the ratings spectrum. The managers look for bonds that they believe to be undervalued and which they think will reprice.
The portfolio is well diversified with exposure typically between 60–80 companies and is a combination of the managers’ “best ideas”.
It has returned 5.95 per cent in 2017, 1.66 percentage points ahead of the IA Sterling Strategic Bond sector average’s 4.29 per cent although it has been one of the most volatile funds in the sector this year.
Performance of fund vs sector YTD
Source: FE Analytics
The fund has been a top quartile performer over three, five and 10 years and is in the second quartile of the sector over shorter three and six months and one year time periods.
Baillie Gifford Corporate Bond, which sits in the AFI Cautious portfolio, has an OCF of 0.53 per cent and a yield of 3.5 per cent.
The final bond fund chosen by our AFI panellists that has returned more than 5 per cent this year is the £1.8bn Henderson Strategic Bond fund.
The fund, which has returned 5.32 per cent so far this year, is managed by John Pattullo and FE Alpha Manager Jenna Barnard invests in many types of bonds across multiple geographies, but does not take currency risks.
Strategic decisions are based on their view of the risks of default, the future course of interest rates, economic trends, and supply and demand in the various fixed-income markets.
It uses a flexible mandate but the managers have a counteracting bias to defensive sectors that should be more stable over the course of the economic cycle.
Henderson Strategic Bond has consistently been an above average performer, sitting in the first or second quartile of the IA Sterling Strategic Bond sector over one, three, five and 10-year time frames.
However, due to its flexible nature and its ability to use derivatives, the fund may be a little more volatile than its peers.
The fund, which is a constituent of the AFI Balanced and Cautious portfolios, currently yields 3.6 per cent and has an OCF of 0.69 per cent.