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Royal London Sterling Extra Yield Bond Fund research update

Richard Troue | Thu 19 November 2015

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.

Summary

  • The Greek debt saga, slowing Chinese economic growth and falling commodity prices have caused volatility across bond markets over the past year
  • Eric Holt expects this to continue, but believes he can still identify interesting opportunities and generate an attractive income
  • Almost half of the fund remains invested in high yield bonds, which are higher risk, but there is also exposure to higher-quality bonds where Eric Holt believes they offer a good yield
  • The fund has performed well relative to peers in the IA £ Strategic Bond sector and currently offers an attractive yield of 7.06% (variable and not guaranteed)
Percentage growth - 1, 3 and 5 years
Nov 14 -
Nov 15
Nov 12 -
Nov 15
Nov 10 -
Nov 15
Royal London Sterling Extra Yield Bond 1.59% 27.03% 53.68%
IA £ Strategic Bond 1.44% 11.58% 23.56%

Past performance is not a guide to future returns. *Source: Lipper IM to 02/11/2015

Our view

The best years of performance for the bond market might well be behind us. However, with debt so high, inflation low and global economic growth modest we do not see a catalyst to push interest rates significantly higher. Against this backdrop we continue to believe bond yields remain acceptable.

Investing in this environment is no easy task and we believe it is more important than ever to select experienced bond fund managers with good long-term track records. We particularly like those with the flexibility to invest across the bond market spectrum and hunt for opportunities off the beaten track.

Eric Holt fits the bill and remains one of our favourite bond fund managers. The fund offers the potential for a high income, but it is also higher risk. It could be held alongside other bond funds as part of a diversified portfolio and our favourites feature on the Wealth 150. For investors who prefer to delegate the fund selection to our experts, the HL Multi-Manager Strategic Bond Fund combines our favourite managers, including Eric Holt, in a single fund although this does add to the costs and the Multi-Manager fund does not specifically target a high income.

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Performance review

If proof were needed that investing requires patience, the Royal London Sterling Extra Yield Bond Fund provides a good example.

The fund performed well from launch in September 2003, but was hit hard during the financial crisis. At this time the fear was many companies would go bankrupt, particularly the type of less financially secure company Eric Holt targets. Bond prices fell heavily as a result.

At the low point in April 2009 a £10,000 investment made at launch would have been worth less than £5,800. Since then bond prices have rebounded and most of the capital loss has been recovered.

At first glance performance doesn’t look impressive, but this is only half the picture. Over the period since launch a £10,000 investment has generated over £7,750 in income. For those who reinvested the income - to buy more units on which further income is earned - their £10,000 investment would be worth £21,620. This highlights the importance of income as a component of returns and the need to take a long-term view.

Performance of £10,000 invested at launch

Performance graph

Source: Lipper IM to 02.11.2015

Annual income on a £10,000 investment

Performance graph

Source: HL to 30.10.2015

Recent performance has also been encouraging, with the fund up 53.7%* compared with 23.6%* for the average fund in the IA £ Strategic Bond Sector over the past five years, with income reinvested. Please remember past performance is no guide to the future.

% growth over 5 years

Performance graph
Annual percentage growth
Nov 10 -
Nov 11
Nov 11 -
Nov 12
Nov 12 -
Nov 13
Nov 13 -
Nov 14
Nov 14 -
Nov 15
Royal London Sterling Extra Yield Bond 3.98% 16.35% 14.94% 8.78% 1.59%
IA £ Strategic Bond 0.58% 10.10% 5.10% 4.65% 1.44%

Past performance is not a guide to future returns. *Source Lipper IM to 02/11/2015.

Portfolio positioning

Eric Holt acknowledges the wider investment environment presents challenges and he expects bond markets to remain volatile. That said, he focuses on individual bond selection rather than the outlook for the market as a whole. He still sees opportunities to generate attractive income and has invested the portfolio as follows:

  • Investment grade bonds (21%) - these are issued by higher-quality companies, but offer higher yields than gilts to compensate for the risk of lending to corporations. In some cases Eric Holt believes yields are attractive relative to the extra risk. In this category he holds bonds issued by financial companies such as Santander, Legal & General and Investec
  • High yield bonds (44%) - these are higher risk bonds issued by less financially-secure companies, which tend to offer higher yields to compensate. The manager likes bonds secured against companies’ assets, such as property. Pub operators such as Enterprise Inns and Punch Taverns are among the fund’s high yield investments
  • Unrated bonds (35%) - the companies behind these bonds have not paid for a credit rating. Analysing them requires more effort, but Eric Holt is supported by a well-resourced and experienced team. Bonds secured against a company’s assets are also preferred for this segment of the portfolio because the assets can be sold to recover some value for bondholders if the company gets into trouble

We continue to believe this fund has the potential to deliver an attractive income, although investors should be aware it is managed with a higher risk approach so there could be volatility along the way. The fund remains on the Wealth 150+ list of our favourite funds across the major sectors.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.


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