Fixed Income  

‘Hard graft’ needed to eke out returns

‘Hard graft’ needed to eke out returns

Bond funds can be found in three groups within the Investment Adviser 100 Club: the Sterling Corporate Bond, Sterling Strategic Bond and Specialist categories.

In a low interest rate world, and with inflation gradually creeping up, fixed income has had something of a roller-coaster ride in recent years. 

However, the average five-year return of the 15 bond members across the three groups is a healthy 44.7 per cent, in sterling terms, to May 18 2017, data from FE shows. This suggests that investors in these funds have not suffered too badly in the longer term, and in the shorter term the 12-month average performance is also good at 12.6 per cent. 

Macroeconomic events may have had more of an impact on the 100 Club than some might have predicted, with just three returning members in 2016. Two of these appeared in the Sterling Strategic Bond category for the second consecutive year – Aviva Investors Higher Income Plus and Axa Sterling Strategic Bond. 

While the M&G Global Macro Bond fund made its third appearance in the 100 Club in 2016 in the Specialist Bond fund category, the Sterling Corporate Bond group saw a complete turnover with five new members. 

Interestingly, it was also this category that delivered some of the best-performing funds across the five-year period, with three of the five members appearing in the top-five bond vehicles across all three groups. 

The remaining top-five portfolios, including the best-performing Pioneer Emerging Markets Bond, came from the Specialist Bond category. For the 12 months to May 18 the top-five bond funds again consisted of Specialist and Corporate Bond members, with the Specialist sector taking three of the top-five places. 

This suggests that investors who have diversified their fixed income exposure into more niche areas, be it in terms of strategy or region, have benefited from the recent upheavals in global markets and the actions of central banks around the world. 

Looking ahead, the macroeconomic outlook remains uncertain. While the US Federal Reserve is looking to gradually raise interest rates, Japan and, to some extent, Europe remain set on a more accommodative approach. 

Peter Toogood, investment director at The Adviser Centre, comments: “Globally, monetary policy has been breathtakingly accommodative, resulting in a series of mini-economic cycles, rather than any secular trend. This has all been at the expense of building up even more debt than in 2008, with China taking a particularly strong lead in loosening [monetary policy] since the crisis. 

“At the same time, every risk asset, and in fact non-risk assets [US Treasuries were once seen as risk-free], have multiples attached to them that should make everyone blink and refresh their screens. 

Mr Toogood adds: “The fund managers we review remain wary, cautious, bored or highly selective. Fixed income managers see far lower potential returns, given the low level of yields and the lack of a compelling credit spread. Genuine hard graft will be required to eke out a return.”