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Bond fund quarterly review – has fixed income been a safe space?

We take an in-depth look at the bond markets and how Wealth Shortlist funds have performed.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Coronavirus has dealt a shockwave to equity and bond markets around the world. It’s taken us back to volatility not seen since the global financial crisis over a decade ago.

Since the lows of March and April, and as economies have started to show signs of recovery, markets have rebounded and there have been glimmers of growth.

However, it’s hard to imagine economies returning to pre-Covid levels just yet. As Chief Medical Officer Chris Whitty has consistently reminded us, easing of coronavirus restrictions “is not risk free”.

In this bond sector review we look at what's happened in fixed income markets in recent months, and share our outlook for the future. We also take a closer look at how different areas of the bond market have performed, including which funds delivered the best returns.

This article isn’t personal advice. If you're not sure if an investment is right for you, please contact us about advice. Investments rise and fall in value, so you could get back less than you invest.

Central bank and government intervention

Central banks across the world reacted with speed and strength when coronavirus first impacted markets back in March. The big ones have already expanded their balance sheets to the tune of $3trn so far this year.

Their interventions have offered never-before-seen levels of support, providing much needed liquidity to keep markets functioning and flowing. Alongside this, we’ve seen the US Federal Reserve cut interest rates to a target range of 0%-0.25% and the Bank of England cut rates to just 0.1% – the lowest level in its 325-year history.

We’ve also seen much greater co-ordination with central banks and governments. The UK government’s spending is already up a sizeable 40% on the same time last year.

Ultimately this means a growing debt pile, and the Office for Budget Responsibility recently estimated that the UK government would need to borrow £372bn this year to top up what it receives from taxation, and to meet public spending needs.

In spite of all of this support, the GDP stats have been grim. GDP is the most common way to measure the output of an economy, and the UK’s latest figure shows a fall of 20.4% between April and June. That’s compared with the first quarter of this year, and the figure officially marks the first recession here since 2009. That said, there were signs of recovery in June’s figures, and we’ve yet to see the data showing the impact of relaxing lockdown restrictions in July.

What does this mean for bonds?

Usually when GDP falls, bond issuance falls too. But that hasn’t been the case this year as companies have needed cash to keep them going.

When lockdowns first started lots of businesses looked to revolving lines of credit previously agreed with banks to plug this gap. A bit like arranging an overdraft over a full loan.

The need for cash hasn’t stopped though. Since then, we’ve seen huge increases in companies issuing bonds. In Europe, companies raised €340bn in the second quarter, up 60% on the previous year. In the US the figure increased to a record $682.5bn.

The difficulty for investors is choosing which companies to lend to, distinguishing between those that should be healthy enough further down the line to service and repay their debt, and those unlikely to recover to pre-virus profitability.

In the period of market shock, we saw sharp price moves hit fixed income markets. Bid-ask spreads (the difference between the price at which you can buy a bond compared with the price you can sell it at) widened, and liquidity in some bonds was difficult to find. But in the second quarter of the year we’ve seen investor sentiment and prices rebound strongly. This has been helped by economies partially re-opening, and how forthcoming policymakers have been.

What’s the outlook for bonds?

As Covid-19-related disruption continues to negatively affect economies around the world, it’s likely lots of businesses will remain challenged. The performance of lots of companies will hinge on the ongoing strength of the rebound.

If we see repeat waves of infections and lockdowns there’s a danger that liquidity problems could become solvency problems.

For some, this will mean taking on more debt to see them through to the other side and for others it will mean defaulting on their debts and going out of business.

This could lead to higher unemployment, which would be likely to put downward pressure on consumer spending, locking in lower economic growth.

We’re also likely to see more and more fallen angels as a result. Fallen angels are bonds that were previously labelled the highest quality (investment grade) but end up being downgraded to lower quality high-yield ratings.

There can be a number of reasons why bonds are downgraded, but it’s usually down to a fall in revenues.

A downgrade should be a sign a company won’t be able to pay the interest due, at least as easily as it once did. And the more debt a company has, the more quickly this could become a problem.

Car maker Ford has been a high profile fallen angel example, losing its investment grade status. Beyond autos, we’ve seen banks and travel and leisure companies hit by downgrades too.

Governments will also be aware that taking away support packages could jeopardise employment, business survival and the recovery we’ve seen so far. There’s also the real risk that markets have become reliant on government or central banks to step in when there’s an issue. That’s fine when policymakers are in ‘do whatever it takes’ mode, but this might not last forever. While this support is there, government bond yields could remain low, at least in the short term.

High unemployment, rising defaults and low growth taken together with an increasingly elderly population could mean we’re set for a low inflation period, meaning yields could go even lower. However, there’s also the possibility that continued quantitative easing creates inflation, as the system is over-flooded with stimulus.

Bond markets have generally risen strongly over recent years, but as a bond’s price rises its yield falls. And given the very low level yields are now at, the scope for significant further gains is limited. This means there are lower potential rewards on offer for taking on the risks of lending to companies and governments. There's also more room for yields to rise and prices to fall. Investors could see more volatility in this area of the market than they've been used to in recent years. There could be an increased potential for capital losses.

While Covid-19 is the issue that’s front and centre, there are other risks on the horizon too. Remember the US election and the end of the Brexit transition period are looming in the not too distant future. There’s always the twists and turns of the frosty US-China relationship to occupy investors’ minds, too.

With all that, we do still think there’s a place for bonds in most investment portfolios – particularly those with a focus on capital preservation. Yields might be low, but they usually offer more stability than equities – of course no yields are guaranteed.

Bonds are key for a diversified portfolio, and we think most investors should carefully consider their benefits.

How have bond funds performed?

Gilts or government bonds delivered the highest returns over the last 12 months out of all of the major Investment Association (IA) bond sectors, with an annual return of 10.5%*. Remember past performance is not a guide to the future.

Gilts are particularly sensitive to changes in the interest rate, and this year we’ve seen the Bank of England cut interest rates down to just 0.1%. When interest rates, and the yields on bonds fall, their prices rise delivering a capital gain.

Corporate bonds, representing debt issued by companies, also delivered respectable returns over the year with an annual return of 5.9%.

The strategic bond and global bond sectors also finished in positive territory, with some more modest returns. However, the IA High Yield and the IA Global Emerging Markets Bond Hard Currency sectors lost money.

1 Year Bond performance - Total Return

Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2020.

A standout performer over the last year has been the Allianz Strategic Bond fund, co-managed by Mike Riddell and Kacper Brzezniak. It’s been the top performer across the different bond sectors and has delivered an annual return of 30.4%*, compared with 4.0% for its IA £ Strategic Bond peer group average.

The fund was positioned defensively in the first quarter of 2020 with the managers believing markets weren’t pricing in sufficient risk. But in the second quarter of this year, after the US Federal Reserve stepped up its quantitative easing programme, the managers took advantage of attractive valuations in new corporate bond issues. They increased their exposure to investment grade credit ahead of a potential recovery.

Annual percentage growth
July 15 -
July 16
July 16 -
July 17
July 17 -
July 18
July 18 -
July 19
July 19 -
July 20
Allianz Strategic Bond 6.9% -2.4% -1.8% 13.3% 30.4%
IA £ Strategic Bond 5.8% 5.2% 0.1% 5.6% 4.0%

Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2020.

Find out more about Allianz Strategic Bond including charges

Allianz Strategic Bond Key investor information

Research team activity

We continued deep analysis looking for great fund managers – this quarter we spent a lot of focus on the high-yield area. There are always two parts to our analysis, the data-crunching quantitative, and the in-depth qualitative.

As part of our qualitative research we recently spoke to David Backhouse, manager of the Threadneedle High Yield Bond fund, Steven Logan and Ben Pakenham, co-managers of the Marlborough High Yield Fixed Interest fund and Phil Milburn and Donald Phillips, co-managers of the Liontrust High Yield Bond fund.

The Liontrust High Yield Bond fund managers focus on the higher-quality end of the high yield market and run a portfolio of between 50 and 100 bonds to generate a combination of income and capital growth for investors. The fund launched in June 2018, so it’s still quite small in size and has plenty of room to grow assets in the future.

Find out more about Liontrust High Yield Bond including charges

Liontrust High Yield Bond Key investor information

We’ve added a number of new funds to the Wealth Shortlist recently. The sole bond fund addition was Artemis Corporate Bond.

The fund launched in October 2019, managed by Stephen Snowden, a seasoned corporate bond investor with over 20 years of experience. We like the manager's clear, disciplined investment process which blends ‘top down’ macro-economic research with ‘bottom up’ fundamental analysis of individual companies’ bonds. This helps Snowden determine which bonds are attractively priced and in sectors of the economy that could benefit from positive trends.

We’ve also spoken to the managers of the Legal & General All Stocks Gilt index fund. This passive fund aims to track the performance of the UK Gilt market as measured by the FTSE Actuaries UK Gilts All Stocks Index. The fund invests in every bond in the index in the same proportion, a process called full replication. It features on the Wealth Shortlist.

Find out more about Artemis Corporate Bond including charges

Artemis Corporate Bond Key investor information


Find out more about Legal & General All Stocks Gilt index including charges

Legal & General All Stocks Gilt index Key investor information

How have our Wealth Shortlist funds performed?

Our Wealth Shortlist selections have delivered mixed performance over the past year, with some outperforming their benchmark, and some underperforming. We wouldn’t expect them all to perform in the same way, and think it’s important for investors to build a portfolio filled with managers employing different approaches and investing styles to generate returns.

The best performing Wealth Shortlist bond fund in this period has been Invesco Tactical Bond. It beat our other picks in its sector and delivered an index-beating 9.8%*, finishing 5.8% ahead of the wider Strategic Bond peer group. The fund, which is now co-managed by Stuart Edwards, Jack Parker and the experienced Paul Causer after Paul Read stepped back earlier this year, performed well over the coronavirus-related market falls. Remember though that this is a short time period to measure performance over.

The managers have had a cautious outlook for some time and positioned the fund defensively, explaining why it had lagged behind the market over the last few years. But this positioning helped the fund to shelter its value when others were falling in value, reinforcing our view that in a falling market we would expect it to hold up better.

On the flip side, the weakest performer was Artemis High Income. The fund, which is also part of the Strategic Bond sector, is managed by Alex Ralph. Ralph focuses on higher yielding bonds in order to generate a higher income for investors. These higher-risk bonds are often issued by less-creditworthy companies, and they haven’t held up as well as other higher-quality bonds over the period. This meant the fund lost 1.9% of its value over the period. It was 5.9% behind the peer group.

Ralph has the flexibility to invest up to 20% of the fund in UK and European shares in order to boost the fund’s yield. This allows her to change how the fund is invested depending on her views on the wider economy and the state of bond markets. She’s an experienced manager, and has a good long-term track record of delivering returns for investors.

As the Artemis Corporate Bond fund was launched in October 2019, it’s currently not possible to provide annual performance figures.

Here’s how our Wealth Shortlist funds have done. For more details on each fund and its risks please see the links to their factsheets and key investor information below.

Annual percentage growth
July 15 -
July 16
July 16 -
July 17
July 17 -
July 18
July 18 -
July 19
July 19 -
July 20
Artemis Strategic Bond 4.4% 7.4% 0.9% 3.8% 3.7%
Jupiter Strategic Bond 5.0% 4.5% 0.1% 7.3% 5.6%
Invesco Tactical Bond 2.2% 3.7% -0.5% 1.4% 9.8%
Artemis High Income 5.8% 5.2% 0.1% 5.6% 4.0%
IA £ Strategic Bond 5.8% 5.2% 0.1% 5.6% 4.0%
Annual percentage growth
July 15 -
July 16
July 16 -
July 17
July 17 -
July 18
July 18 -
July 19
July 19 -
July 20
M&G Global Macro Bond 21.3% 3.6% -1.2% 12.2% 6.0%
IA Global Bonds 17.8% 4.2% -0.1% 8.4% 1.3%
Annual percentage growth
July 15 -
July 16
July 16 -
July 17
July 17 -
July 18
July 18 -
July 19
July 19 -
July 20
Royal London Corporate Bond 9.0% 4.4% 0.7% 6.9% 4.6%
Fidelity MoneyBuilder Income 9.9% 2.2% -0.3% 7.2% 5.4%
Artemis Corporate Bond n/a n/a n/a n/a n/a
Morgan Stanley Sterling Corporate Bond 9.3% 4.0% 0.2% 7.3% 5.1%
IA £ Corporate Bond 9.8% 3.6% 0.0% 7.1% 5.9%

Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2020.

n/a - full year data unavailable.

Find out more about Artemis Strategic Bond including charges

Artemis Strategic Bond Key investor information


Find out more about Jupiter Strategic Bond including charges

Jupiter Strategic Bond Key investor information


Find out more about Invesco Tactical Bond including charges

Invesco Tactical Bond Key investor information


Find out more about Artemis High Income including charges

Artemis High Income Key investor information


Find out more about M&G Global Macro Bond including charges

M&G Global Macro Bond Key investor information


Find out more about Royal London Corporate Bond including charges

Royal London Corporate Bond Key investor information


Find out more about Fidelity MoneyBuilder Income including charges

Fidelity MoneyBuilder Income Key investor information


Find out more about Artemis Corporate Bond including charges

Artemis Corporate Bond Key investor information


Find out more about Morgan Stanley Sterling Corporate Bond including charges

Morgan Stanley Sterling Corporate Bond Key investor information


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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