Investors' hunt for yield in fixed interest markets remains as strong as ever. Driven by central bank policy of lowering interest rates and instigating quantitative easing, government bond prices have risen in recent years, pushing their yields down to all-time lows. As such, many investors have been forced into riskier areas of corporate bond markets in order to satisfy their demand for income.
Jenna Barnard, John Pattullo and Nicholas Ware, managers of the Henderson Fixed Interest Monthly Income Fund, are cautious of the increased demand for higher-risk, high yield bonds seen in recent years. That said, they continue to believe the best returns can be generated from this area of fixed interest markets. Over 56% of the portfolio is currently invested in high yield bonds.
Elsewhere, within the higher-quality, investment grade area of bond markets, the managers have focused on BBB-rated bonds, which fall at the lower-quality end of the investment grade arena. A quarter of the portfolio is invested here. Investors tend to be compensated for investing in higher-risk bonds by receiving a higher yield. Given this fund's focus, it currently yields an attractive 5.4%, though this is variable and not guaranteed. The fund managers also have the flexibility to invest in derivatives which involves additional risk.
Presently, the managers favour bonds issued by larger companies in mature industries, which tend to be less sensitive to fluctuations in the economic cycle. They are currently positive in their outlook for a number of telecoms businesses, including Numericable-SFR based in France. In particular, they like mobile operators who have successfully bundled broadband, landline, TV and mobile products in attractively priced packages, which help maintain a more stable customer base. On the other hand, economically-sensitive industries such as retail, food and energy have tended to be avoided.
Going forwards, the managers will continue to focus on buying quality companies with proven business models and a good management team at the helm. Following a strong period of performance for high yield bonds in recent years, they believe the majority of the fund's returns will come from income rather than capital growth over the coming year, although periods of volatility should also be expected.
Our view on this fund
Jenna Barnard and John Pattullo took over management of this fund in June 2011, while Nicholas Ware has been co-manager for just over a year. Since June 2011, the fund has outperformed the sector average, growing by 26.7%*, with income reinvested, against 24.9% for the sector. Though please remember past performance is not a guide to future returns.
|Annual percentage growth|
| Mar 10 -
| Mar 11 -
| Mar 12 -
| Mar 13 -
| Mar 14 -
|Henderson Fixed Interest Monthly Income||7.2%||-0.2%||12.7%||7.5%||6.3%|
|IA £ Strategic Bond||6.6%||4.8%||9.2%||3.9%||6.3%|
Past performance is not a guide to future returns. Source: Lipper IM* to 02/03/2015
In our view, this fund is run by an experienced team of bond managers and therefore it has the potential to perform well over the long term. However, we currently favour other managers in the IA £ Strategic Bond sector that take a more flexible approach to bond investing and are not constrained by the aim of achieving a high yield at all times. The fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors.