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Bond funds quarterly review – growth, inflation and interest rates all on investors’ minds

We look at the headlines gripping bond markets, share our outlook for the bond market, and look at how some of our Wealth Shortlist funds have fared.

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.

Recent months have seen bond markets dominated by talk of whether economic recoveries are on track, whether higher inflation’s here to stay, and when the right time is to unwind monetary policy support.

Let’s start with the first of those here in the UK. The Office for Budget Responsibility expects the UK economy to return to pre-pandemic levels around the turn of the year and believes its GDP growth forecast will reach 6.5% for 2021. 

These expectations are underpinned by the success of the vaccine, along with consumers and businesses adapting well to public health restrictions. Some growth forecasts are even higher. Capital Economics is estimating GDP growth of 6.8% for the same period.

This relatively strong rebound hasn’t been all plain sailing though. Supply constraints in different industries, labour shortages, rising energy prices and difficulty adjusting to post Brexit changes have all posed challenges. These factors threaten to result in an imbalanced recovery.

Average annual GDP Growth (2000-2017) Annual GDP Growth forecast 2021 Average annual inflation (2000-2017) Annual inflation forecast 2021
UK 2.1% 6.8% 2.0% 2.4%
USA 2.2% 5.6% 2.2% 4.4%
Eurozone 1.3% 5.3% 1.7% 2.5%
China 8.0% 8.0% 2.6% 1.0%

Source: Capital Economics to 27/10/2021

Inflation reached multiyear highs in the US and the Eurozone as well as the UK. Many expected inflation to rise as the economic recovery gathered pace. But there has been significant debate about whether this period of higher inflation will be temporary or here to stay.

Some economists now worry that the UK could be entering a period of ‘stagflation’. This is where economic growth slows and prices rise. If this is the case, it could dampen the outlook into next year.

Central banks, like the Bank of England (BOE) and the Federal Reserve in the US, have been clear in their expectations that higher inflation should be temporary. But more recently we’ve seen a shift in tone.

BOE Governor Andrew Bailey still thinks higher inflation will be temporary. But it could last longer than previously expected and the BOE would have to act in response to surging prices.

Any potential rate rise is usually good news for savers and bad news for borrowers who haven’t fixed the interest rate on their borrowing. But if rates go up too quickly, it could derail the recovery achieved so far. So, the BOE might take a bit more time to assess things like how the labour market is coping with the end of the furlough scheme.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, please ask for financial advice.

Bonds, inflation and interest rates – what it all means for investors

What has the research team been up to?

In the last quarter, we’ve had several video calls with different fixed income managers including Stuart Edwards and Julien Eberhardt of Invesco Tactical Bond. We’ve since decided to keep the fund on the Wealth Shortlist after long serving manager Paul Causer retires at the end of 2021. You can find out more about the reasons why in our latest update.

More about Invesco Tactical Bond including charges

Invesco Tactical Bond Key Investor Information

We also had a video call with Stephen Snowden and Juan Valenzuela of Artemis Strategic Bond. This was following the departure of James Foster and Alex Ralph. We rate the experienced duo highly, so were disappointed to see them depart after delivering good performance to patient investors. After these manager changes, we removed the fund from the Wealth Shortlist, you can read our rationale in our latest update.

Although we’ve removed Artemis Strategic Bond from the Wealth Shortlist, this isn’t a recommendation to make any changes to a portfolio. Investors should make sure any investments match their investment goals and attitude to risk. If you're not sure if an investment is suitable for your circumstances, ask for financial advice.

More about Artemis Strategic Bond including charges

Artemis Strategic Bond Key Investor Information

During October, we met with Kris Atkinson of Fidelity MoneyBuilder Income for an update on the fund’s positioning and performance. Atkinson thinks it’s time to be cautious given the low level of compensation available for investing in some bonds. However, he still sees value in some asset backed bonds and bonds issued by companies in Covid-affected sectors.

More about Fidelity MoneyBuilder Income including charges

Fidelity MoneyBuilder Income Key Investor Information

How have our fixed income Wealth Shortlist funds performed?

Our Wealth Shortlist bond picks have delivered mixed performance over the past year. We wouldn’t expect them all to perform in the same way though. If all your funds in a sector are performing well at the same time, they're probably investing in similar areas.

We think it’s important for investors to build a portfolio filled with managers who have different approaches and investing styles. Doing this should better investors’ chances of performing well over the long run.

All investments fall as well as rise in value, so you could get back less than you invest. For more details on each fund and its risks, please see the links to their factsheets and key investor information below.

Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

The best performing Wealth Shortlist fixed income fund over the past year was Artemis High Income with a strong return of 11.95%*. This was well ahead of its benchmark, the IA £ Strategic Bond peer group which gained 4.40%. Past performance is not a guide to the future. After a change of fund manager, it’s now managed by David Ennett and Jack Holmes with Ed Legget remaining on the shares part of the portfolio. We recently wrote an update to provide more details on these changes.

More about Artemis High Income, including charges

Artemis High Income Key Investor Information

The worst-performing Wealth Shortlist fixed income fund over the last 12 months was the M&G Global Macro Bond fund, with a return of -6.21%*. This is behind the fund’s benchmark, the IA Global Mixed Bond peer group average, which lost 0.92% over the same period.

The fund has had less credit risk than some other funds. Fund manager Jim Leaviss is a vastly experienced bond investor with a strong track record. We think his fund has the potential to do well over the long term.

More about M&G Global Macro Bond, including charges

M&G Global Macro Bond Key Investor Information

Strategic Bond – annual percentage growth

Oct 16 – Oct 17 Oct 17 – Oct 18 Oct 18 – Oct 19 Oct 19 – Oct 20 Oct 20 – Oct 21
Artemis High Income 9.98% 1.16% 4.61% 2.42% 11.95%
Artemis Strategic Bond 7.57% 0.31% 5.58% 3.82% 2.99%
Invesco Tactical Bond 3.28% 0.84% 3.18% 9.78% 5.42%
IA £ Strategic Bond 4.82% 1.15% 7.46% 3.21% 4.38%

Past performance is not a guide to the future. Source: *Lipper IM, to 31/10/2021.

Global Mixed Bond – annual percentage growth

Oct 16 – Oct 17 Oct 17 – Oct 18 Oct 18 – Oct 19 Oct 19 – Oct 20 Oct 20 – Oct 21
M&G Global Macro Bond 5.12% 0.72% 7.47% 9.20% -6.21%
IA Global Mixed Bond 0.23% 1.02% 6.79% 3.90% -0.93%

Past performance is not a guide to the future. Source: *Lipper IM, to 31/10/2021.

Corporate Bond – annual percentage growth

Oct 16 – Oct 17 Oct 17 – Oct 18 Oct 18 – Oct 19 Oct 19 – Oct 20 Oct 20 – Oct 21
Fidelity MoneyBuilder Income 3.39% 0.16% 8.52% 4.03% 2.21%
IA £ Corporate Bond 4.51% 0.19% 8.54% 4.64% 1.14%

Past performance is not a guide to the future. Source: *Lipper IM, to 31/10/2021.

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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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