- A more adventurous way to get a high income from bonds
- It benefits from one of the most experienced bond teams in the UK
- They look for income opportunities in overlooked areas of the market
We think this fund is a great choice for the potential for a high income from corporate bonds.
Fund manager Eric Holt and his team focus on niche and overlooked areas of the bond markets. This includes bonds backed by the assets a company owns, such as property or cash flows. If the company isn't able to pay back its debts, it means bondholders can make a claim on these assets. They're seen as higher risk so they pay a higher income to compensate.
The team has lots of experience investing in some of these more unfamiliar bonds. They carry out plenty of research before making an investment, and hold a wide range of bonds so returns don't rely on a single holding.
We view the fund as a more adventurous way to invest in bonds because high yields are typically offered by companies that are less financially secure. As a result, the fund's unlikely to offer shelter in an economic or bond market downturn, and we expect it to be more volatile than most others in the Strategic Bond sector.
We think the team are capable of good long-term performance though, and expect them to deliver a high income to investors. As such the fund's on the Wealth 50 list of our favourite funds.
Performance and income
Over the past year the fund's performed better than the average fund in the Strategic Bond sector.
2018 was a particularly good year. While most funds in the sector lost money, Royal London Sterling Extra Yield Bond grew 1.7%, with income reinvested. Bonds issued by oil companies Premier Oil and Point Resources, and asset manager Standard Life were among the best performers.
Long-term performance has been good too, though it hasn't always been plain sailing, as you can see in the chart below, and past performance isn't a guide to future returns.
Royal London Sterling Extra Yield Bond – performance since launch
|Annual percentage growth|
| Jun 14 -
| Jun 15 -
| Jun 16 -
| Jun 17 -
| Jun 18 -
|Royal London Sterling Extra Yield Bond||3.6%||2.9%||17.2%||7.0%||6.3%|
|IA £ Strategic Bond||2.5%||2.9%||6.5%||0.3%||5.2%|
Past performance is not a guide to the future. Source: Lipper IM to 30/06/2019
Most of this performance has come from income payments. For example, a £10,000 investment made ten years ago would have since paid out £11,292 in income, and the remaining original investment would be worth £12,072. If you chose to reinvest the income rather than have it paid out, this would have turned £10,000 into £33,985. Please remember the value of any investment, and the income from it, will fall as well as rise and you could get back less than you invest.
The fund currently yields 5.66%, though this is variable and not an indicator of future income.
Holt and his team have recently made a number of new investments in:
- Hybrid bonds issued by German property company Aroundtown. These bonds pay a fixed rate of income until 2024, at which point either the rate of interest paid will change, or the company will repay the original amount invested to bondholders and no longer pay any interest.
- Retail Charity Bonds, issued to raise money for Greensleeves Care Homes. These pay an attractive rate of interest of 4.25%.
- Yew Grove REIT, which is a real estate investment trust rather than a traditional bond. It receives rental payments from investing in Irish office and industrial properties, most of which gets paid out to investors. Eric Holt says the properties are well let, so it's easier to anticipate how much money they'll get paid in future.
Holt currently finds the most opportunities for income in higher-risk, higher yield areas of the bond market. On the other hand he's avoided areas where he doesn't think there's enough value or income on offer, including those that are perceived to be safer, like UK government bonds.
Please note as this is an offshore fund you are not normally entitled to compensation through the UK Financial Services Compensation Scheme.