- UK government bond, or gilt, yields remain historically high
- Concerns about persistent inflation unlikely to cease with looming Budget costs and potential Trump tariffs on the horizon
- AJ Bell highlights five bond funds investors may wish to consider
Paul Angell, head of investment research at AJ Bell, comments:
“With government bond yields moving beyond generational highs and credit spreads remaining remarkably tight, many investors will be reassessing their bond allocations to ensure they’re appropriately positioned for the heightened risks and opportunities in the market. Here we highlight five funds that we think could be worth considering in any upcoming review.”
- Artemis Strategic Bond (IA Sterling Strategic Bond sector):
“Artemis Strategic Bond is a fixed income fund where the team seek to outperform the IA Strategic Bond sector through a flexible investment approach. The fund is managed by three co-portfolio managers in David Ennett, Grace Le and Liam O'Donnell. David Ennett and Grace Le worked alongside Artemis’ head of fixed income, Stephen Snowden, at Kames Capital until 2019 when the team followed Snowden to Artemis. O'Donnell, on the other hand, is a more recent addition to the team, joining from abrdn where he worked on the abrdn Strategic bond fund.
“The team work collaboratively, with each manager bringing their own expertise to macroeconomic analysis and credit selection, across high yield bonds and investment grade corporate bonds. The investment process looks to assess the current opportunities across a range of fixed income assets and the team seek to outperform the wider sector through asset allocation, sector allocation, duration management and company selection. The managers consider their views on the economic cycle, default outlook, yields and interest rates in order to determine fund positioning.”
- Waverton Sterling Bond (IA Sterling Strategic Bond sector):
“The Waverton Sterling Bond fund is a carefully managed strategic bond fund that’s guaranteed to always be at least 80% invested in higher quality, investment grade bonds. At the helm is seasoned investor Jeff Keen, who’s managed the fund since inception in 2010. Keen co-manages the fund with James Carter, who joined Waverton from Moody’s in 2018 and has been co-manager on the fund ever since.
“The investment process is a blend of top-down macro analysis and bottom-up security selection. The managers target bonds paying an attractive income but with minimal downside risk. The fund is constrained to a minimum duration of five years (duration is a measurement of a bond’s sensitivity to interest rates). This structural position differs to its peers, meaning the fund’s performance can be variable to the wider sector, and the team can supplement the core of the portfolio with high yield and emerging market bonds, but they will only be a relatively small portion of the fund (max 20%).”
- Artemis Corporate Bond (IA Sterling Corporate Bond sector):
“Well-known bond investor Stephen Snowden and his team have consistently delivered outperformance for investors from both a sector allocation and security selection perspective since the fund’s 2019 launch. The fund is typically run with more risk than its index, with its risk allocation fluctuating between interest rate and credit risk depending on the team’s views. That said, the managers are committed to keeping the fund’s interest rate risk within a fairly narrow band (1.5 years) of that of the index. This ensures the fund’s return profile remains equivalent to that of wider fixed-income markets.
“With a flexible, high conviction approach, led by a highly motivated and committed fund manager, this fund could feasibly continue to outperform its iBoxx £ Collateralized & Corporates index, something made all the more likely by its very reasonable OCF (ongoing cost figure) of just 0.37%.”
- Aegon High Yield (IA Sterling High Yield sector):
“Philosophically, the fund’s co-managers, Thomas Hansen and Mark Benbow, believe passively investing in a high yield index is nonsensical given indices are weighted to the most indebted businesses. The managers are therefore entirely index agnostic in their running of this fund, outside of the sector requirement to be at least 80% invested in high yield bonds.
“Given this index agnostic approach, Aegon's global team of credit analysts are therefore crucial to the success of the fund, as they help generate the individual bond ideas that populate the portfolio. The fund is additionally actively managed from a top-down perspective, with the co-managers assessing the fundamentals, valuation, technicals and sentiment of the market, with the extent to which they have a positive outlook across these factors determining the fund’s beta.
“The co-managers have been on the fund together for almost five years, through which time they have successfully navigated the Covid pandemic and rising interest rates, delivering outperformance of the market in both up and down markets, as well as top quartile returns within the peer group.”
- HSBC Global Aggregate Bond ETF (IA Global Mixed Bond sector):
“The HSBC Global Aggregate Bond ETF XCHGBP is a sterling denominated index tracker fund with a focus on global government and corporate bonds. The fund seeks to replicate the performance of its benchmark index, the Bloomberg Global Aggregate TR USD Hedged index. The index, weighted by market capitalisation, is a flagship measure of global investment grade bonds from 24 local currency markets and includes government, government-related, corporate and securitised fixed-rate bonds, from both developed and emerging markets issuers.
“The fund is a physically replicating fund that may or may not hold every security, or the exact weighting of a security, in its benchmark index, but will aim to track its benchmark as closely as possible and may use optimisation techniques to achieve this. Currency exposure on this share class is hedged back to pound sterling, to help mitigate the impact of global currency fluctuations in the returns to sterling-based investors. Despite being available in an open-ended structure, the fund does have ‘ETF’ within its name, as, being Dublin domiciled, Central Bank of Ireland regulations stipulate the fund must have ETF in the name if there are both listed (ETF) and unlisted (index mutual fund) share classes of the strategy.”