Royal London Corporate Bond: December 2021 fund update

• Co-managers Jonathan Platt and Shalin Shah have over 45 years’ combined investment experience
• The fund has delivered good returns over the long term and the managers benefit from the support of a strong fixed income team at Royal London
• The managers dig a little deeper to find bonds that might be missed by other investors
• This fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

We think the Royal London Corporate Bond fund is an adventurous choice with excellent long-term growth potential, although this may come with more volatility. For this reason it could work well as part of a portfolio invested for income, focused on the long-term.

Manager

The fund is co-managed by the experienced duo Jonathan Platt and Shalin Shah. Platt is head of the fixed income team and joined the Royal London Group in 1985. He has over 35 years of investment experience over which he’s been key to developing the team’s fixed interest investment process. Shah has over 12 years’ experience working as part of the fixed income team and has co-managed the fund with Platt since 2016.

We rate the managers highly. They're prepared to invest in parts of the bond market a lot of other investors ignore. Looking for opportunities in under-researched areas like unrated bonds can throw up chances to boost returns, but it can also add risk. Both managers also have management responsibilities on other funds, but they’re supported by a very well-resourced team, so we feel comfortable they can handle the workload.

Process

Platt and Shah believe credit markets are inefficient and offer opportunities that active managers can exploit. They start by forming a view on the direction of the economy, considering factors like economic growth, inflation and interest rates. This helps them decide which areas to invest in.

We think the team's edge comes from their detailed research into 'low-profile' parts of the market. These under-researched bonds may be unrated (their credit quality hasn’t been assessed by a credit ratings agency), complex and often secured against a company's assets. Platt and Shah do their own research to check if the quality of these bonds is high enough to be considered for the fund. The managers can potentially add value by looking in this area of the market, but these types of bonds are higher risk, and the lack of credit rating can make them harder to trade, adding liquidity risk, particularly in a falling market. They tend to pay a higher income to compensate for the higher risk. Around 7.7% of the fund is currently invested in this area.

The fund has a focus on A and BBB-rated bonds, which sit at the lower quality end of the investment grade corporate bond spectrum. The fund also invests in higher-risk high-yield bonds which can add risk. The managers aim to be well diversified through exposure to a range of different sectors. Charges can be taken from capital, which can increase the yield but reduces the potential for capital growth.

The managers have continued to look for opportunities in the new issues market – these are bonds newly issued by companies. Bonds bought in this category include those of French bank BPCE, real estate company Blackstone Property Partners Europe and social housing association Southern Housing Group. Some bonds have been sold too including those in transport group Stagecoach and air traffic controller NATS (En Route).

The managers expect the current higher levels of inflation we’re seeing in the UK to fall, although we can expect higher energy costs and supply chain disruptions in some sectors to continue into 2022. But the impact of higher taxes squeezing the disposable income of consumers and rising wage bills hampering profitability of businesses should mean that inflation will moderate into the second half of the year.

Culture

We believe Royal London’s speciality is in managing fixed income portfolios. Their philosophy is that all well-diversified portfolios should include an element of income. They use a combination of top-down macroeconomic analysis and bottom-up security selection to manage their bond portfolios which has served them well over time. The managers also consider environmental, social and governance (ESG) factors in their analysis. This helps them identify potential risks that could affect the long-term viability of lending, increase costs to the business or result in future litigation.

The managers are rewarded based on the long term performance of their fund, so their interests are aligned with investors. We think their incentivisation structure is better than most and encourages good behaviour, but it isn’t as long term as in some other groups.

Cost

The fund has a standard annual ongoing charge of 0.56%, but we’ve secured a 0.19% saving for HL clients. That means a net ongoing charge of 0.37%, which we think is one of the best value actively managed options in the corporate bond sector. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund’s more adventurous approach means it’s tended to do better than others in the corporate bond sector when the market's rising but declined faster when it's falling. It struggled during the financial crisis of 2008-2009 as the managers' preference for subordinated bank debt and asset-backed securities led to losses. But generally the fund’s performed well since. Investors who've been prepared to ride out the dips have been rewarded with strong long-term performance. Past performance is not a guide to the future.

Over the past year the fund has performed better than the IA £ Corporate bond peer group average, finishing 2.85%* ahead. Our analysis suggests that this has largely been the result of good bond selection by the fund managers. The fund’s investments in the bonds of banks and financial services companies and insurers have been among the biggest contributors to performance over this period.

A year is a short timeframe to consider performance over though and should be viewed in the context of a longer time period. Investors could get back less than they invest as the value of investments goes up and down.

Past performance is not a guide to the future. Source: *Lipper IM to 30/11/2021.

Find out more about Royal London Corporate Bond fund including charges

Royal London Corporate Bond Key investor information