Three bond funds launched in 2012 have delivered top quartile returns during their first five years of investing, according to data from FE Analytics.
Bonds have been on a 30-year bull run as inflation has been tamed and loose central bank monetary policies have created a low-yield environment which has seen more money flow into fixed income, driving prices to record highs.
In more recent years, yields have started to come under pressure as interest rates have begun to rise after the unprecedented central bank response to the global financial crisis of 2007-2008.
Yet, while concerns been raised about the longevity of the bond bull-run – as central bankers move towards policy tightening – it has continued to be an important source of yield for investors.
As such, below we look at the three bond funds in the Investment Association universe of the 174 funds that launched in 2012 who sit in the top quartile of their respective sectors during their first five years.
Previously we looked at the young equity funds shooting the lights out over five years and in an upcoming article we will also focus in on the multi-asset funds.
The first fund to get off to a flying start in the fixed income space is the five FE Crown-rated Sanlam Strategic Bond fund run by Craig Veysey.
The £157m fund was launched in March 2012 and during its first five years has returned 43 per cent, 13.38 per cent above the IA Strategic Bond sector average.
Performance of fund vs sector over first 5yrs since launch
Source: FE Analytics
The fund aims to provide a total return for investors with an attractive monthly income as well as capital growth by investing in undervalued bonds in the credit market.
Veysey also uses a macroeconomic overlay, meaning he will use government bonds in addition to corporate bonds on a hedged and unhedged basis.
The fund has been a top quartile performer in each of the past three calendar years and is on track to do the same this year, having never made a negative return in any full calendar year since launch.
In the fund’s latest factsheet, Veysey said: “In order to achieve the objective of producing an attractive total return in the portfolio over the long term, a relatively high and consistent level of income generation from the fund’s bond investments remains key.
“We currently find the best value strategic credit allocation that also meets our relatively lower tolerance for credit risk, to be mainly in the investment grade debt issues of financial institutions.”
Indeed, the fund is 29.4 per cent weighted to banks, with 25.8 per cent in sovereign debt and 19.8 per cent in insurance.
Sanlam Strategic Bond has a yield of 6.1 per cent and a clean ongoing charges figure (OCF) of 0.54 per cent.
BNY Mellon Emerging Markets Corporate Debt
The other two funds on the list both reside in the IA Global Emerging Markets Bond sector – an asset class that has proven popular more recently thanks in part to the low-yield environment globally and relatively attractive income on offer from the sector
The five crown-rated BNY Mellon Emerging Markets Corporate Debt has been the best fund in the sector in the first five years since its launch in 2012, returning 73.57 per cent compared to the average peer’s return of 21.39 per cent, as the below chart shows.
Performance of fund vs sector over first 5yrs since launch
Source: FE Analytics
The £260m is run by FE Alpha Manager Colm McDonagh and is slightly underweight investment grade bonds though this still makes up 49.9 per cent of the fund. Its largest overweight is in B-rated investment grade debt.
The fund, which is most weighted to debt from Brazil, China, Peru and Argentina has an above benchmark duration of 5.8 years, an average coupon of 5.5 per cent and average quality of BB+.
Earlier this year, McDonagh explained he has been upping his weighting to Latin America as, in the near term, he expects the benign environment for emerging market corporates to continue.
This, he added, should be helped by robust economic growth and recovering corporate fundamentals while range-bound US treasuries and strong technicals are also supportive.
The fund has an OCF of 0.82 per cent.
Standard Life Investments Emerging Market Debt
The final fund is Standard Life Investments Emerging Market which also resides in the IA Global Emerging Markets Bond sector.
The five-crown rated fund is run by FE Alpha Manager Richard House, and in its first five years since inception has returned 49.36 per cent, beating the sector average by 29.84 percentage points, as the below chart shows.
Performance of fund vs sector over first 5yrs since launch
Source: FE Analytics
The fund is 43 per cent weighted to debt from Latin America, with 24.3 per cent in Africa and the Middle East and 15.4 per cent in Asia, with its largest country overweights in the US, Argentina and Morocco.
Conversely, the fund has no exposure to large emerging market countries including China, Turkey, the Philippines and Russia.
In its latest factsheet, House said: “The global macro environment continues to be supportive of emerging market assets.
“Europe and Japan are showing stronger growth compared with recent years, while the US economy continues to perform well.
“The stronger external environment is feeding into export performance for emerging market manufacturing countries, while the commodity dependent emerging market economies are benefiting from more favourable commodity prices.”
The fund has a yield of 4.44 per cent and an OCF of 0.82 per cent.