Morgan Stanley Sterling Corporate Bond - a no nonsense bond fund

• Ric Ford and Leon Grenyer think interest rates and inflation will remain low
• They think bond yields are still attractive, but returns won’t be as good as in recent years
• The fund currently yields 3.2%, variable and not an indication of future income

Our View

This is a no nonsense corporate bond fund run by an experienced team. They invest in a wide selection of high-quality corporate bonds with the aim to generate income and some growth over the long term.

It’s run in a more conservative way than some other corporate bond funds. This means it could perform a little better when bond markets fall, but also lag behind when they rise rapidly. There are no guarantees though.

This doesn’t mean the managers are afraid to take a view. They’ll invest more aggressively when attractive yields are on offer, but will sit back and be more defensive if they think the risks outweigh the rewards. We like this flexible approach. The fund is also available with low ongoing charges of just 0.22%, plus our platform fee of up to 0.45% per year.

Performance review

It’s been a tough year for corporate bonds. Trade wars, slowing economic growth, and rising interest rates have caused greater ups and downs in the market than investors have been used to in recent years.

The fund eked out a modest return of 0.2% for the past year, although this is slightly better than the average fund in the IA £ Corporate Bond sector. The bonds of financial companies, such as banks and insurers, held back recent performance after a strong run towards the end of 2017. In contrast, those in the utilities sector performed better. Please remember past performance is not a guide to the future.

Past performance is not a guide to the future. Source: Lipper IM to 31/07/2018 (performance data for 31/07/2013 to 31/07/2014 relates to the ‘inclusive’ share class).

The managers’ long-term track record is impressive. The fund didn’t fall to the same extent as many others during the financial crisis. And they’ve done well overall in the subsequent recovery. Over the past ten years the fund has risen 80% and the average fund in the sector has grown by 66%*.

Morgan Stanley Sterling Corporate Bond - performance over 10 years

Past performance is not a guide to the future. Source: Lipper IM *to 31/07/2018.

Managers' outlook

The Bank of England recently raised interest rates to 0.75% from 0.5%. Ric Ford and Leon Grenyer don’t think there’ll be another rise before the UK leaves the EU next year. Even then they’re only likely to rise gradually. They also expect inflation to remain relatively low and economic growth to be robust.

This means companies should be able to pay their debts. Even though yields on corporate bonds are low by historical standards they still deliver an attractive enough income in a low-interest-rate world, in the managers’ view.

Of course, trade wars and Brexit continue to present risks. But the managers currently expect common sense to prevail, and they’re not expecting a full blown trade war or a no deal Brexit.

They’re happy to own bonds issued by banks in the belief they’re in a much stronger position now than in the aftermath of the financial crisis. Bonds from Santander, Lloyds, Barclays and Nationwide, the building society, are held in the fund. These are all big, national banks that are important to the countries in which they operate.

They also have some investments in higher-risk high-yield bonds, including those issued by Pizza Express. They think the company will benefit from its expansion into China. The flexibility to use derivatives also adds risk.

They’re avoiding companies and industries that face long-term challenges. In the case of car makers, for example, electric vehicles are an opportunity and a threat as it’s not clear yet who will emerge as the most successful manufacturers and brands.

Please read the Key Features/ Key Investor Information in addition to the information above.

Find out more about this fund (inc. charges)