iShares Corporate Bond Index: January 2023 fund update

• BlackRock, a pioneer in index investing, has a great record of managing index funds
• We view this fund as a good option to get access to a broad spread of sterling corporate bonds
• The fund has closely tracked the Markit iBoxx GBP Non-Gilts Overall TR Index since launch in 2010
• The fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The iShares Corporate Bond Index fund offers a way to invest broadly across the corporate bond market with a large allocation towards the UK. The fund holds investment grade bonds, meaning they have a credit rating of at least BBB, but excludes gilts which are bonds issued by the UK government.

An index fund is one of the simplest methods of investing, and we think this fund could be a great, low-cost addition to a portfolio. Bonds can be a great way to diversify a portfolio focused on shares or other assets, or a more conservative portfolio in need of some income.

Manager

The fund is managed by the BlackRock EMEA Index Fixed Income Portfolio Management Team, led by John Hutson. Hutson joined the firm in 2011 and has over 20 years of experience in the industry. Hutson previously had responsibility for Credit Index Investments within the team.

While Hutson leads the team, each index fund at BlackRock has a primary and secondary manager, though in practice a broader team helps to manage each fund. Alvin Do, is currently the lead portfolio manager on this fund having taken over from Allesandro Ferrante. Allesandro left the BlackRock team last year to pursue a portfolio management role at another firm.

Within the team, portfolio managers rotate their responsibilities, which gives them experience across different regions like the UK, the US and Europe. This ensures continuity in the way the index funds are managed, even if there are team changes.

BlackRock also has other teams that trade shares and bonds based across the world. The teams function in different time zones, which means they have access to timely information, and can provide input on market trends and corporate actions. Their global approach helps drive efficient management of their funds, while providing simple and effective tracking options for investors.

Process

This fund aims to track the performance of the broader corporate bond market. It invests in around 1,200 holdings and is predominantly made up of UK, US and Supranational issuers.

This fund invests in almost every bond in the benchmark. This is known as partial replication, which could help the fund track the index closely without incurring the cost of holding every bond. Bonds that make up a very small part of the index are sometimes not held in the fund as they can be more difficult or expensive to buy and sell. The fund also invests in high-yield bonds which increases risk.

The fund has tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by BlackRock on a daily and monthly basis to ensure the fund is being run efficiently.

The fund can also lend some of its investments to others in exchange for a fee in a process known as stock lending. This helps to keep costs lower. Since BlackRock’s lending program started in 1981, only three borrowers with active loans have defaulted. In each case, BlackRock was able to repurchase every security out on loan with collateral on hand and without any losses to their clients.

Culture

BlackRock is currently the largest asset manager in the world. The company was founded in 1988 by eight partners including current CEO Larry Fink and is known for both active and passive strategies across the world. Employees at BlackRock are encouraged to hold shares in the company so that they are engaged with helping the company perform well and grow. The iShares brand represents BlackRock's family of index tracking and exchange-traded funds.

As one of the world's largest asset managers, and with lots of resource and knowledge under its belt, BlackRock aims to drive further development in this part of the investment market. Being such a large player in the index tracking arena gives BlackRock unique access to the marketplace, which can help reduce trading costs.

The team running this fund also works closely with various equity and risk departments across the business. We believe this adds good support and challenge on how to run the fund effectively.

ESG Integration

BlackRock has offered Environmental, Social and Governance (ESG) -focused funds for several years, including through its iShares range of passive products. However, it only made a company-wide commitment to ESG in January 2020. Following that announcement, the company promised to expand its range of ESG-focused ETFs, screen some thermal coal companies from its actively managed funds and require all fund managers to consider ESG risks.

BlackRock’s Investment Stewardship Team aims to vote at 100% of shareholder meetings where it has the authority to do so, meaning they vote at around 17,000 meetings on 165,000 proposals each year. The Investment Stewardship team engages with companies, in conjunction with fund managers, and the results of proxy votes can be found on the BlackRock website’s ‘proxy voting search’ function.

The firm has courted controversy in recent years for failing to put its significant weight behind shareholder resolutions aimed at tackling climate change. It responded by committing to be more transparent on its voting activity and providing rationales for key votes. The firm also outlines its work on voting and engagement in annual and quarterly Stewardship reports.

As the iShares Corporate Bond Fund tracks an index of bonds, it does not specifically integrate ESG considerations into its investment process, and the fund therefore has the flexibility to invest in bonds issued by companies that are deemed to be ESG sinners, such as weapons and alcohol producers.

Cost

The fund has an ongoing annual fund charge of 0.11%. We believe this is a reasonable charge when compared with other GBP corporate bond tracker funds. Our platform charge of up to 0.45% per annum also applies.

Performance

The iShares Corporate Bond Index Fund has done a good job tracking its benchmark, the Markit iBoxx GBP Non-Gilts Overall TR Index, since launch. During that time, the fund has returned 43.69%. As is typical of index funds, it’s fallen behind the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped to try and keep performance as close to the index as possible.

The top 10 bond holdings only make up 4.62% of the fund, meaning the performance is spread across a number of different holdings. This should reduce the concentration risk of relying on the performance of a handful of bonds.

With rising interest rates globally, alongside high inflation, bonds had a particularly difficult time in 2022. Inflation makes bond prices fall because the fixed coupon payments paid by most bonds are worth less in the real world.

Similarly, as bonds are typically riskier than putting money into a savings account at a bank, the yields on bonds have risen as interest rates have increased. As bond yields rise, their prices fall.

Over the last year the fund has fallen 17.56%*, reflecting the current global economic challenges.

At 31 December 2022, the fund’s yield was 2.43%. Income isn’t guaranteed, and yields aren’t a reliable indicator of future income.

Given BlackRock's size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well in future, though there are no guarantees on how it will perform. Remember, past performance isn’t a guide to future returns.

Past performance is not a guide to the future. Source: *Lipper IM to 31/12/2022.

Find out more about iShares Corporate Bond Index including charges

iShares Corporate Bond Index Key investor information