Although the UK economy has been growing steadily, Rhys Petheram, manager of the Jupiter Corporate Bond Fund, feels the recovery is fragile and could easily be derailed. He believes the Bank of England is keen to raise interest rates before another recession can begin. As such, while the European Central Bank remains committed to low interest rates and monetary stimulus, he feels the UK is now on a gradual path to higher rates.
In anticipation of an increase in interest rates, the duration of the fund (how sensitive it is to changes in interest rates) has been reducing, and is currently around two thirds that of the benchmark index. As interest rates have so far remained unchanged, this has hurt performance over the past year. Over the same period, an increasing exposure to Australian, New Zealand and American government bonds has held back performance, as these positions tended to underperform their UK counterparts. Overseas government bonds currently account for around 15% of the portfolio, which the manager holds to maintain diversification.
In the manager's view, the current environment calls for a conservative approach to corporate bond investing. He therefore seeks bonds in companies he considers to be reliable and which are actively reducing their level of debt. As he expects volatility in bond markets to increase, he has positioned the portfolio defensively with almost the entire portfolio invested in lower-risk investment grade bonds. Of this, around 50% is invested in BBB-rated bonds (which fall at the lower-quality end of the investment grade spectrum) where he feels the income paid is high enough to compensate for the additional risk taken. Elsewhere, the manager has reduced exposure to the financial sector and has tended to avoid bonds issued by banks. The manager also has the flexibility to invest in higher-risk high yield bonds although this area currently only accounts for 0.7% of the fund.
Given the conservative positioning of the portfolio, we would generally expect it to lag a strongly rising market. Rhys Petheram was appointed co-manager in July 2012 (he subsequently became lead manager in October 2012) and over this time corporate bond markets have performed strongly. In part, this has led the fund to underperform the IA £ Corporate Bond sector by 1.63%* and the Markit iBoxx Sterling Corporates Index by 6.50% since his time as lead manager. Please remember past performance is not a guide to future returns.
Performance of the Jupiter Corporate Bond Fund over Rhys Petheram's time as lead manager
Past performance is not a guide to future returns. Lipper IM* to 02/03/2015
|Annual percentage growth|
| Mar 10 -
| Mar 11 -
| Mar 12 -
| Mar 13 -
| Mar 14 -
|Jupiter Corporate Bond||5.83%||7.33%||8.68%||1.99%||8.62%|
|IA £ Corporate Bond||5.78%||5.98%||9.78%||2.51%||9.17%|
|Markit iBoxx Sterling Corporates TR||7.38%||8.44%||12.31%||4.12%||11.49%|
Our view on this fund
Rhys Petheram's cautious approach to fixed income investing could prove resilient in a challenging environment for corporate bonds. Indeed, the fund has tended to fall considerably less than the sector average in weaker markets. However, this means the fund has also tended to lag its peers in a strongly rising market for bonds. The manager has a shorter track record compared with many of his more experienced peers and we currently have greater conviction in other managers in this sector. The fund is therefore not on the Wealth 150 list of our favourite funds across the major sectors but we will continue to monitor his performance and inform investors if our views change.