Best in class: Schroder High Yield Opportunities

The higher inflation figures released last week was a double-edged sword for pensioners. While the state pension and lifetime allowance should rise next year, increased food and energy prices will mean their spending power is reduced and cash savings eroded.  

With inflation hitting 3 per cent and interest rates still languishing near zero, the real value of cash is falling at its fastest rate for five years. If inflation stays at this level for the next three years, £1,000 in a cash savings account could be worth as little as £920. That's an 8 per cent fall in value of a 'safe' asset.

With so much uncertainty still surrounding Brexit negotiations, and the UK consumer now looking vulnerable, the Bank of England monetary policy committee is probably kicking itself that it didn't raise interest rates a couple of years ago, when the economic picture was ever-so-slightly rosier.

It remains to be seen whether they will take the bull by the horns and increase the base rate next week or whether they will bottle-it. But even then, any rise is likely to be minimal.

The higher conviction and more ‘table-thumping’ the analyst’s views on a certain company, the greater its position in the portfolio.

Low cash savings rates have been an issue for almost a decade now, and many savers have already abandoned the safety of the asset for the potentially higher returns on riskier assets like bonds and equities. But the search for an income – particularly one that actually beats inflation – is becoming harder by the day. 

A bond fund I like that has a very attractive yield of just over 6 per cent, is Schroder High Yield Opportunities (née Monthly High Income). 

Run by Michael Scott, who is ably assisted by Schroders' global credit team, this fund invests primarily in pan-European high yield bonds – so it is not without a degree of risk. 

The biggest risk is the chance of companies in the portfolio defaulting on their loan repayments, but this is managed by capping exposure to a single company at 5 per cent of the portfolio. In addition, the fund is well diversified and uses a disciplined, repeatable process that draws on a variety of sources to offer a high yield - both in absolute terms and relative to its peers – and in doing so, generates a monthly income for investors. 

The team combine broad macroeconomic themes (ones they believe will play a major role in global credit markets) and fundamental research (where analysts rank specific issuers they believe will thrive on those themes) to find investments they believe offer the best risk/reward profile and that can achieve consistent performance through the market cycle. 

Themes are categorised by the time horizon in which they are expected to develop and analysts focus on companies that may have fallen under their competitors’ radars.

They particularly like those that they believe can benefit from multiple themes. The higher conviction and more ‘table-thumping’ the analyst’s views on a certain company, the greater its position in the portfolio.

Under Mr Scott’s tenure since 2012, volatility has been controlled to offer investors some protection during tough markets – another characteristic that should appeal to many – and the fund is a long-term performer among the very best in its peer group.

Over one, three, five and 10 years, it is first or third in the high yield bond sector .

Darius McDermott is managing director of FundCalibre

Note: Performance data is according to FE Analytics, as at 17 October 2017