Until fairly recently, when investors were looking for a fixed income portion for their portfolio, their options were somewhat limited: government bonds, generally from the UK or other major economies around the world, and conventional corporate bonds.
The universe has broadened considerably in recent decades to include things such as high yield bonds, recently de rigueur but often derided as ‘junk bonds’ in the past. Now there are even more alternative fixed income options available to retail investors.
A lot of the new products have been inspired by the insistent search for yield that has occupied investors ever since interest rates hit record lows and investors realised they could not get much from a simple bank account, or even a simple government bond.
Investors have therefore been treated to new kinds of products, investing in areas such as asset-backed securities and loans.
Within the open-ended fund space these ‘niche’ instruments have largely remained the preserve of strategic bond managers, who have the flexibility to invest across the universe of fixed income markets.
But in the closed-ended investment trust arena there have been many more specific niche investment trusts being launched. Certain senior secured loans cannot be bought within a retail open-ended fund due to regulatory concerns about liquidity and risk within the market, so that gives the investment trust space an advantage.
Assets such as ABS are freely available to both fund structures, and TwentyFour Asset Management has developed a reputation in the past five years of providing solid access to the asset class, through its Monument Bond fund and its strategic bond fund, the Dynamic Bond fund.
Andrew Alexander, head of investments and product strategy at Three Counties, invests in the Monument Bond fund for his clients and says it should be “serious consideration due to the floating rate element to it”.
In the AIC Debt sector there have been six new trusts launched within the past 12 months and a total of 12 within the past three years, as fund groups and managers have realised the desire for such products.
The Neuberger Berman Global Floating Rate Income fund has already raised more than £1.2bn from investors through investing in senior secured corporate loans, which is one of those areas not accessible through retail open-ended rivals.
M&G recently tried to get around this by launching a Global Floating Rate High Yield fund for James Tomlins. The fund is the first of its kind in the open-ended space and has already attracted the interest of managers such as Simon Callow at Seneca Investment Managers.
Mr Alexander says that more and more investors are now looking at these types of products because they “are possibly realising the risks associated with fixed income”.
He says that for a long time investors did not really appreciate the risks from fixed income but that now it is “no longer viewed as a risk-free asset with yields at historic prices determined by super loose monetary policy”.