Morgan Stanley Sterling Corporate Bond: August 2021 update

• Richard Ford is an experienced corporate bond investor and has the support of a strong team at Morgan Stanley
• The managers mainly invest in higher quality bonds, believing that this will drive superior long term returns
• The fund has performed well over the long term, delivering good returns to patient investors
• The fund is on our Wealth Shortlist of funds chosen by our analysts for their long term potential

How it fits in a portfolio

The managers focus on income but aim to generate some growth over the long term too by investing in a wide selection of high-quality corporate bonds. The fund is run in a more conservative way than some corporate bond funds, and could add some balance to a portfolio focused on shares or higher risk bond funds. This means it could perform a little better when bond markets fall, but also lag behind when they rise rapidly.

Manager

The fund is managed by Richard Ford and Dipen Patel who are supported by a strong fixed income team at Morgan Stanley from across the globe. Ford became manager of the fund in 2005 and was joined by Patel as co-manager in 2018. The managers also run a number of other fixed income strategies at Morgan Stanley but we think the duo have the experience, support and resources to do a good job for investors.

Process

The managers start by forming their outlook for the wider global economy, considering the prospects for growth, interest rates, inflation and more. They then research individual companies and bonds, trying to make sure companies have the ability to pay the full interest on their bonds and make the capital repayments too.

They think superior long-term returns will be generated by holding better quality bonds. Although they could provide a lower return than riskier ones when the economy's doing well, they feel these higher-quality bonds will more than make up for it by falling less when bond markets fall. Ford and Patel also take account of valuations to avoid bonds that could be too expensive, or where the yield is too low to offset the risks they've identified.

The fund invests heavily in the UK, but includes some global bonds too. Where they invest in overseas bonds, the managers remove the effect of exchange rate changes by using derivatives, which adds risk. They also have the freedom to invest in high yield bonds which also adds risk.

Ford and Patel have continued to find opportunities in the bonds of companies that were hit hard by Covid-19 restrictions but will benefit from the reopening of the economy. Some examples include holiday park operator Center Parcs, and Informa, the event, intelligence and research company.

The managers believe the higher inflation we’re seeing coming through in economic data as a result of supply chain and labour market disruption will be transitory. As a consequence, they think the Bank of England will be slow to raise interest rates whilst the economy is still recovering from the effects of the pandemic.

The fund continues to have a duration less than that of the index. Duration is a measure of the sensitivity of the price of a bond to a change in interest rates. Whilst the managers remain positive about the opportunities in credit markets on the basis of the strength of corporate earnings and the policy support the markets received, they still generally favour bonds with shorter maturities.

Culture

Morgan Stanley’s scale and strong history of managing clients’ money means Ford and Patel can rely on an extensive team of experienced fixed income professionals to help them find the best investment opportunities. We view it positively that the managers are incentivised to focus on long-term performance.

The managers also take into account environmental, social and governance (ESG) factors, believing that they have the ability to impact the price and risk of a bond and that responsible companies tend to have fewer defaults. This includes assessing the momentum of a company’s ESG metrics to conclude if its performance is improving or declining in these areas.

Cost

The fund has an annual ongoing fund charge of 0.37%, but through Hargreaves Lansdown you can secure an ongoing saving of 0.15%. This means you’ll pay an ongoing charge of 0.22%. We think this is great value. The HL platform fee of up to 0.45% a year also applies.

Performance

The fund's relatively defensive approach means it has tended to perform broadly in line with a rising market and provides some shelter during tougher periods. As a long-term investment, the fund has done well for investors who've patiently stayed invested, but there are no guarantees and past performance is not a guide to the future.

The fund has performed well over the past year, finishing 0.7%* ahead of its peer group average. Having provided some shelter during difficult market conditions, the fund has rebounded well from the impact of coronavirus on markets. The fund’s investments in high yield bonds (currently 8.8% of the fund) performed well over the year aiding the fund’s performance. These are riskier bonds issued by less creditworthy companies that tend to pay higher levels of income to compensate investors for the extra risk taken. The fund’s investments in investment grade companies (those with a credit rating higher than BBB) and particularly in the Financials, Insurance and Technology sectors have also contributed positively to performance. Not all of the fund’s investments perform in the same way though. Investments in the Utilities sector lost money over the year.

We continue to believe Richard Ford and Dipen Patel have the potential to reward long-term investors.

Past performance is not a guide to the future Source: *Lipper IM to 31/07/2021.

Find out more about Morgan Stanley Sterling Corporate Bond, including charges

See Morgan Stanley Sterling Corporate Bond Key Investor Information