Skip to main content
  • Register
  • Help
  • Contact us
  • Log out of your HL account

Bonds

These funds invest in bonds, which typically pay a fixed rate of interest and often form part of income portfolios.

Richard Troue - Head of Investment Analysis
9 January 2019

Most investors get exposure to bonds through funds run by an experienced portfolio manager. There are several different types of bond fund:

  • Corporate bond funds – focus on higher-quality, investment grade corporate bonds. Compared to high yield bonds, investment grade corporate bonds have a lower risk of default and are more likely to be able to repay their debts. They tend to offer lower yields as a result.
  • High yield bond funds – invest in bonds paying higher levels of income. This compensates investors for the extra risk taken, because these bonds are issued by companies that are less likely to be able to pay off their debts.
  • Strategic bond funds – have the freedom to invest across the bond markets, including government, corporate and high-yield bonds. They also have some flexibility to invest overseas. Some focus more on paying a high income. Others focus more on growing or sheltering investors' wealth.
  • Global bond funds – invest in government and corporate bonds issued globally. They also hold bonds denominated in currencies other than sterling. This means they might have a lot of exposure to foreign currencies. Similar to strategic bond funds, their objectives vary from fund to fund.
  • Gilt and index-linked gilt funds – mainly invest in bonds issued by the UK government. They typically have a lower risk of default and lower yields than corporate bonds. Index-linked gilts typically increase any income paid and the capital repaid at redemption in line with inflation.

Our view on the Bonds sector

Bonds usually pay a fixed rate of interest. So they can be useful to generate an income.

They're often viewed as ‘lower risk’ than investing in a company’s shares. This means they can help limit some of the volatility that normally comes with investing purely in the stock market.

We believe bonds can play a part in a diversified portfolio. But in recent years a number of risks have built up that investors should be aware of.

Bond markets have performed well over recent years. At the same time, yields have fallen. So the scope for significant further gains is limited and the income on offer has reduced. There's lower potential reward on offer for taking on the risks of lending to companies and governments. And there's more room for yields to rise and prices to fall. This means investors could see more volatility in this area of the market than they've been used to in recent years. It increases the potential for losses. Indeed, 2018 saw some volatility across bond markets.

The main risks to bond investors are a faster-than-expected rise in inflation or interest rates (interest rate risk), a slowdown in economic growth that makes it harder for companies to pay their debts (default risk), or a broad sell-off across the market that makes it difficult to sell bonds at a reasonable price (liquidity risk).

We don’t see a major change in fortunes right now. But the risks are worth keeping in mind. Especially by those who invest in bonds to get an attractive income and reduce volatility.

Our favourite bond funds feature on the Wealth 50. We currently prefer ‘strategic’ bond funds because they have the flexibility to try and make returns from all areas of the bond markets.

Investors who prefer a professional fund manager to run a diversified portfolio of bond funds for them could look at the HL Multi-Manager Strategic Bond Trust. We think the additional costs of a multi-manager fund are justified by this approach.

The HL Multi-Manager funds are managed by our sister company HL Fund Managers.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Bond markets didn’t perform well last year. Brexit, trade wars, and political instability gave investors plenty to worry about. But the main reason bond markets struggled was because interest rates rose in the US. This made the income paid by cash deposit accounts look more attractive, so bond yields tended to rise to compensate. When bond yields rise, prices fall.

UK-based investors saw a partial reprieve because the pound weakened against major currencies such as the US dollar, Japanese yen and euro. This reduced the losses on overseas bonds when returns are converted back to sterling. All the main bond sectors lost money over the year though.

Bond sectors - one year performance

Past performance is not a guide to future returns. Source: Lipper IM, correct at 31/12/2018.

Funds focused on high-yield bonds struggled most over the year. High-yield bonds are issued by less financially secure companies, so they tend to be hit harder when interest rates rise and/or economic growth is slowing. Corporate and strategic bond funds fared a little better. But it was global funds that held up best. This is partly because they hold more overseas bonds, so they benefited more from the weak pound.

Global bond markets have performed very well over the longer term. Especially over the past decade, although there are no guarantees this will continue.

Over recent years bond market performance has been helped by the actions of central banks. In the wake of the global financial crisis in 2008 and the aftershock of the subsequent euro zone debt crisis, central banks around the world cut interest rates and started buying their own government bonds on a massive scale.

This quantitative easing (QE) programme helped to push bond yields to historically-low levels. When yields fall bond prices rise. So in recent years investors have made healthy gains, as well as some income, from bond investments, although this should not be seen as a guide to the future.

2018 saw the start of quantitative tightening, or QT – the process of reducing central banks’ holdings of government bonds. Interest rates started to rise too. So far interest rate rises have been largely restricted to the US, but this has already had an impact on bond markets globally. If it continues or accelerates, the volatility we’ve seen in recent months could continue.

We think it’s likely interest rates will peak at lower levels than they have done previously. Indeed, there’s evidence to suggest US rate hikes are already hitting consumers so they might struggle to increase them much further.

Annual percentage growth
Dec 13 -
Dec 14
Dec 14 -
Dec 15
Dec 15 -
Dec 16
Dec 16 -
Dec 17
Dec 17 -
Dec 18
IA £ Corporate Bond 9.9% -0.5% 8.9% 5.0% -2.2%
IA £ High Yield 1.1% -0.7% 9.9% 6.1% -3.5%
IA £ Strategic Bond 6.3% -0.4% 7.1% 4.9% -2.3%
IA Global Bond 5.0% -0.9 14.3% 1.6% -0.1%

Past performance is not a guide to future returns. Source: Lipper IM, correct as at 31/12/2018.

Investment notes

Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.

Five year performance

  • IA £ Corporate Bond

    +22.4%

  • IA £ High Yield

    +13.1%

  • IA £ Strategic Bond

    +16.2%

  • IA Global Bond

    +20.7%

Past performance is not a guide to future returns. Source: Lipper IM, correct at 31/12/2018.

Our favourite funds in the sector

We regularly review all the main investment sectors. Here we provide comments on a selection of funds in the main bond sectors. They're provided for your interest but are not a guide to how you should invest. If you're unsure of the suitability of an investment for your circumstances seek personal advice. Comments are correct as at December 2018.

For more information, please refer to the Key Investor Information Document for the specific fund risks. Remember all investments can fall as well as rise in value so investors could get back less than they invest. Past performance is not a guide to the future.

To view a full list of our favourite funds within the sector, visit the Wealth 50. There is a tiered charge to hold funds with HL. It is a maximum of 0.45% p.a. - view our charges.

Other funds in this sector

Here we look at some other funds of interest following our most recent sector review. Please note the review may be over a short time period and past performance is not a guide to future returns.

Source for performance figures: Financial Express

Corporate Bond. This fund mainly invests in investment grade corporate bonds. The managers are prepared to be flexible and invest the fund differently to other corporate bond funds. This means performance can look quite different and the fund can be higher risk.

The managers are currently more cautious in their outlook for bond markets. They've kept the fund's 'duration' relatively short and this has helped performance over the past year. This typically provides some shelter when interest rates rise, or are expected to rise, because short-duration bonds don't fall as far when rates rise. The managers currently like financial bonds, including those issued by banks, because they pay a reasonable amount of income. Current investments include bonds issued by Lloyds and Barclays. They’ve also increased exposure to the US where they’re able to find higher yields.

This fund can invest in high-yield bonds and derivatives, which increase risk.

Corporate Bond. The managers are conservative when it comes to bond investing. We view this as a more conventional investment grade corporate bond fund.

The managers currently favour bonds in the financial sector. This includes bonds issued by banks and building societies, such as Lloyds, Santander and Nationwide. This held back the fund’s performance towards the end of last year and it delivered a return slightly lower than the average fund in the sector. Longer-term performance is impressive. The fund has done better than the sector over the long run. This isn't a guide to future performance though.

This fund can invest in high-yield bonds and derivatives, which increase risk.

The manager is prepared to invest in some areas other investors have overlooked. This includes asset-backed bonds, where the investor has a claim on the cash flows made by the underlying company. He recently reduced these bonds and used the cash to take advantage of falling prices elsewhere. He bought bonds issued by GE, the US conglomerate involved in everything from aviation to healthcare and energy. Richard Woolnough is a highly experienced bond investor and he also has the support of a large research team. We expect the fund to perform well over the long run, though there's no guarantees.

This fund can invest in high-yield bonds and derivatives, which increase risk.

Strategic Bond. This is a very flexible bond fund managed by two experienced fund managers. They aim to provide some shelter to your investment when they see tough times ahead, and stronger returns when the outlook is better.

The managers have invested this fund in a way that means it could hold up relatively well if bond markets run into trouble. They currently hold plenty of cash and bonds that can be sold quickly, for example. It also means they can invest in other areas of the market that could provide a stronger return when market conditions look better. The rest of the fund is focused on areas such as financial corporate bonds. The managers think banks are in a much stronger position since the 2008 financial crisis.

This fund can invest in high-yield bonds and derivatives, which increase risk.

Global Bond. Jim Leaviss has a lot of flexibility. He invests across global bond markets and currencies. The fund isn’t focused on providing a high income like some other bond funds, but it offers useful diversification to a UK-focused bond portfolio.

The manager recently reduced exposure to the US dollar and increased exposure to sterling after the latter weakened. He’s also modestly increased investments in corporate bonds, including higher-risk high-yield bonds, after falling prices provided an opportunity to top up. His willingness to do this is one of the reasons we like the fund. Performance has been good over the past year and over the longer term. But this isn’t guaranteed to be repeated in future.

This fund can invest in emerging market bonds and derivatives, which increase risk. The fund may invest more than 35% in securities issued or guaranteed by a member state of the European Economic Area or other countries listed in the fund’s Prospectus.

Strategic Bond. Ariel Bezalel makes full use of the flexibility given to him with this fund. He'll change the way it's invested quickly, depending on his views of the wider economy and bond markets.

The manager is more cautious than he's been in the past. So he’s been investing more in government bonds, particularly those issued by the US and Australia. He also invests in some bonds issued by companies, but has focused on those that are financially strong and make enough cash to keep paying off their debts. This more defensive positioning paid off towards the end of last year when bond markets fell. The manager’s long-term track record is excellent, although there’s no guarantee past performance will be repeated.

This fund can invest in high-yield bonds, emerging market bonds and derivatives, which increase risk.

Corporate Bond. This fund aims to track the performance of the Markit iBoxx GBP Non-Gilts Overall TR Index. This is a broad index of around 1,000 investment grade corporate bonds.

The fund provides investors with a low cost way to gain broad exposure to the UK corporate bond market. This area of the market fell modestly over the past year, though this is not a guide to how the index or fund will perform in future.

Index-Linked Gilt. This fund provides a low-cost way to invest in a number of inflation-protected gilts. These are bonds issued and backed by the UK government.

UK index-linked gilts have performed better than conventional UK government bonds over the past few years, but performance has been more volatile. The fund aims to track the performance of the FTSE Actuaries UK Index Linked Gilt All Stock Index – it's tracked this benchmark tightly over both short and the longer term.

Please note charges can be taken from capital which can increase the yield but reduces the potential for capital growth. The fund may invest more than 35% in securities issued or guaranteed by a member state of the European Economic Area or other countries listed in the fund’s Prospectus.

Latest research updates

Royal London Corporate Bond - An eye for detail

Royal London Corporate Bond - An eye for detail

Thu 07 March 2019

Jonathan Platt and the bond team at Royal London are prepared to look at parts of the market some bond investors ignore. Their approach helps them find attractive opportunities others might miss.

M&G UK Inflation-Linked Corporate Bond – a race against inflation

M&G UK Inflation-Linked Corporate Bond – a race against inflation

Tue 12 February 2019

Inflation can quickly erode the value of your wealth. Find out what’s been happening to inflation and what Ben Lord’s investing in to stay ahead of it.

Artemis Strategic Bond - a better start to 2019

Artemis Strategic Bond - a better start to 2019

Thu 07 February 2019

James Foster and Alex Ralph have managed this fund with a flexible and, at times, more adventurous approach for many years. It’s been successful overall, but 2018 was more challenging. Find out why in our latest update.

Fidelity MoneyBuilder Income - Change well managed

Fidelity MoneyBuilder Income - Change well managed

Fri 01 February 2019

Experienced manager Ian Spreadbury recently retired and leaves the fund in the capable hands of Sajiv Vaid. We met the pair to discuss the fund’s recent performance and how it will be run in the future.

Kames Investment Grade Bond – fund manager change

Kames Investment Grade Bond – fund manager change

Thu 06 December 2018

There have recently been some changes to the team responsible for managing the Kames Investment Grade Bond fund.

Investment notes

Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.

Fund research

Our expert research team provide regular updates on a wide range of funds.

Register for email updates