Of the underlying assets, more than 72 per cent is invested in corporate bonds with roughly 10 per cent in government bonds.
Corporate bonds are generally riskier than their government counterparts, as companies are more likely to default, so to attract investors they need to offer higher yields. The managers – Paul Causer and Paul Read – have clearly been adept at selecting good quality corporate debt to outperform the sector.
Regionally, the UK is the fund’s largest weighting, with nearly one-third of the fund invested, while banking represents the preferred sector with more than 27 per cent allocated.
When analysing the lower end of the Table, the consistent performance of bonds during the past five years becomes more apparent. L&G’s High Income Trust may not have grown as favourably as others, but it has still achieved an average of 5.8 per cent pa. Added weight to this consistency can be seen over three and 10 years, with average growth of 5.4 per cent and 4.7 per cent, respectively.
Even in the short-term, returns in the sector have been impressive. A £1,000 investment on 1 September 2015 into the average high-yield fund would have increased to £1,065 over a 12-month period. This proves that the importance of holding high-yield bonds in a portfolio to not only provide a cushion for more adventurous assets, but also some solid growth.
Recent intentions by the UK’s central bank are likely to have a significant impact on the high-yield market in the coming days, months and years. On 12 September, as part of its quantitative easing programme, the BoE laid out plans to purchase a portfolio of up to £10bn investment grade bonds, financed by central bank reserves, via the Asset Purchase Facility (APF).
The Bank says it will be “representative of issuance by firms making a material contribution to the UK economy in order to impart broad economic stimulus.”
Due to commence on 27 September, the Corporate Bond Purchase Scheme (CBPS) has the intention of lowering sterling corporate bond yields, which aims to reduce the cost of borrowing for companies.
Importantly, the Bank will only purchase investment grade bonds issued by companies that “constitute a material contribution to the UK economy”. This can also include firms incorporated abroad as long as they have a genuine business in the UK, especially those with large numbers of employees and generate significant revenues.
A list of bonds currently eligible for purchase under the CBPS has been released and it includes some of world’s largest companies such as Apple, McDonald’s and Vodafone.