Where AJ Bell’s bond fund investors are putting their money

Funds are a helpful way to get exposure to the bond market for those that aren’t prepared to dive into understanding bonds in depth or simply don’t want to. Investing in individual bonds involves making judgements on the creditworthiness of the company or government issuing them and, with corporate debt in particular, can require putting in minimum sums which would be beyond most of us.

Times you need bonds to step up

While there’s not quite the same level of choice as there is with equity funds, there are still well in excess of 1,000 bond funds available to UK investors. The list below of the most popular bond funds with AJ Bell DIY customers could help you pick through this substantial universe of available options.

What investors look for from bonds

Apart from offering regular income, a key role bonds have played in portfolios historically is to act as a buffer and provide some protection when the equities in a portfolio are experiencing volatility.

Several of these in-demand vehicles are right at the lower end of the risk spectrum. These include money market funds, which invest in very short-term debt and offer returns which are similar to cash, and government bond funds.

The name at the top of the list by popularity is BlackRock ICS Sterling Liquidity Premier Acc, a money market fund. Its average annual total return over the past three years is 4.7%, significantly better than the 1.9% it has achieved on average over 10 years, reflecting a higher interest rate environment in the wake of the pandemic, according to data from AJ Bell and Morningstar Direct.

There are also several passive products in the table which offer broad-based exposure to global and UK corporate and government debt.

Another product popular with investors on the AJ Bell platform has a focus on high yield bonds. Invesco Global High Yield Corporate Bond ESG Climate Transition GBP (Dist) tracks a basket of bonds from issuers in developed and emerging markets, selected based on their ESG credentials and alignment with climate goals.

High yield bonds are closer on the risk scale to equities because they are considered the most likely to default. Investors may not get their capital back in full when this happens although the effect is mitigated by the diversification offered by funds. Ongoing charges on the ETF are 0.3% and it offers a dividend yield of 6.5%.

Actively managed bond fund options

While passive bond funds provide diversified exposure to bonds at a typically lower cost, they face issues in tracking bond indices, which are made up of thousands or tens of thousands of bonds. Instead, bond funds tend to hold a representative sample, which can mean they don’t perform as well as the index.

When an active fund manager is worth the cost

Passive bond funds also do not have the flexibility to choose the best options among the many bonds any one individual company might issue. The way the indices are constructed means they often have the largest exposure to the companies which have issued the most debt, which may not be to every investor’s liking.

The most widely held actively managed fund on the platform is Artemis Corporate Bond. This invests in investment-grade corporate bonds, i.e. those with a lower risk of default, with more than 60% of the portfolio in UK bonds.

This includes debt from issuers like Tesco, Centrica, Marston’s and HSBC. Over three years it has delivered an annualised total return of 7.9% compared with 6.9% for other funds in this category. It yields 5.5% and has ongoing charges of 0.35%.

It is also a constituent of the AJ Bell Favourite funds list, just like another popular actively managed bond option, TwentyFour Corporate Bond.

The asset manager behind the fund Chris Bowie, has been at the helm of the fund for the past 11 years and has decades of experience investing in the fixed-income space. The fund has ongoing charges of 0.34%.