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Bond funds quarterly review – supportive central bank policy continues for now

We look at how different areas of the bond market have performed, 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.

Global economic growth is expected to reach 5.8% this year and 4.4% the next. Prospects have clearly brightened.

But not for all.

Low-income economies, where vaccination progress hasn’t been as strong as more developed economies, are expected to see growth of 2.9%. That’s half the rate of global growth.

Asia & emerging markets sector review

Some countries are recovering quicker than others, and the divergence is likely to stay, depending heavily on vaccine programmes. There are of course other factors too, like public health infrastructure and financial resources, but vaccine progress is likely to remain front and centre.

In this fixed income quarterly sector review, we look at how different areas of the bond market have performed and share our outlook for the bond market. We also look at how some of our Wealth Shortlist funds have fared.

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

The reopening effect

The return of freedoms has been welcomed by many. It’s let businesses, some that haven’t been able to open since the start of the pandemic, start trading again. Easing of social distancing and self-isolation rules means it’s more economically viable for some businesses too.

The reopening effect paints a positive picture for growth, especially with the release of pent up demand.

There are some concerns though. Some think we’re currently experiencing peak growth in a new condensed business cycle. When concerns build up, government bond prices tend to rise and yields fall, as there’s more demand to hold this ‘safe’ investment.

One of the stories of the quarter was the fall in government bond yields, which was a complete reversal of the trend we saw in the first quarter. The 10-year UK government bond yield bottomed out at 0.51% at the beginning of August, before rising a little to 0.57% by the end of the month.

A slightly more hawkish Fed

The US Federal Reserve (Fed) has so far maintained its support for markets. It’s balanced the want for a healthy job market and its average inflation target of 2%. But we’ve seen a slight change more recently.

On the back of some strong inflation coming through Fed Chair Jerome Powell reaffirmed the Fed’s belief that the increase we’re seeing in inflation will prove to be short lived. He thinks there’s some way to go yet before the need for any policy tightening.

However, the Fed did release economic projections, forecasting accelerating economic growth this year. It also highlighted the potential for two rate rises in 2023, a year earlier than previously thought. This might seem a long time away, but when there’s a hint that policymakers are bringing forward the timeframe for raising rates, investors notice.

The key for the Fed will be getting the timing right and avoid jeopardising the recovery that’s been achieved so far.

What the research team have been up to

We recently had a virtual meeting with the managers of the Invesco Tactical Bond fund. The managers combine their analysis of the economy and individual bonds to shape the portfolio. They can invest in all types of bonds, with very few constraints – the fund is invested in whichever parts of the market the managers think offer the best value. The fund’s performed well in the last year, leaving it 0.8%* ahead of the Sterling Strategic Bond peer group average. The fund features on the Wealth Shortlist.

Remember past performance is not a guide to the future. Investments and any income they produce can rise as well as fall in value, so you could get back less than you put in.


FIND OUT MORE ABOUT INVESCO TACTICAL BOND INCLUDING CHARGES

INVESCO TACTICAL BOND KEY INVESTOR INFORMATION


We also spoke with Richard Woolnough, manager of the M&G Strategic Corporate Bond fund this quarter. Woolnough is a seasoned bond investor with decades of experience. He continues to believe that government bonds are an unattractive investment in the current environment of rebounding economic growth and rising inflation. He doesn’t think there’s much value on offer among corporate bonds, but thinks a strong economic recovery along with continued central bank support should keep default rates on corporate bonds low.


Find out more about M&G Strategic Corporate Bond, including charges

M&G Strategic Corporate Bond 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. Some have outperformed their peer group, and others have underperformed. 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.

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. Remember past performance is not a guide to the future. Investments and any income they produce can rise as well as fall in value, so you could get back less than you put in.

The best-performing Wealth Shortlist fixed income fund over the last year was Artemis High Income with a return of 19.9%*. The fund sits in the IA Sterling Strategic Bond sector and is mainly managed by Alex Ralph, with Ed Legget managing the portion of the fund (up to 20%) invested in the shares of UK and European companies.

As 2020 progressed, the fund’s investments in the shares of cyclical companies that rely on a strong economy to do well increased. These investments have performed well and were recently boosted by strong trading at Entain and Deutsche Telecom. In the last few months the fund has continued to benefit from its bonds in company sectors that ebb and flow with the wider economy – oil in particular has rallied hard. Ralph has continued to take positions in companies who should benefit from the reopening of economies. She’s added new issues from Centre Parcs, David Lloyd and Punch Taverns to the fund.


Find out more about Artemis High Income, including charges

Artemis High Income Key Investor Information


The worst-performing Wealth Shortlist fund in these sectors in the last 12 months was the M&G Global Macro Bond fund with a return of -0.6%*. The fund has had less credit risk than some other funds and remains cautiously positioned, primarily on valuation grounds. At current levels, Leaviss doesn't believe investors are being attractively compensated for taking credit risk. He remains positive on the US Dollar though and believes it should benefit from the improved economic outlook and the good progress of the vaccine rollout in the US versus other markets. 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.


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

M&G Global Macro Bond Key Investor Information


Strategic Bond – Annual percentage growth

Jul 16 -
Jul 17
Jul 17 -
Jul 18
Jul 18 -
Jul 19
Jul 19 -
Jul 20
Jul 20 -
Jul 21
Artemis High Income 9.6% 1.7% -4.7% 5.2% 19.9%
Invesco Tactical Bond 2.9% -1.0% -5.4% 17.7% 12.9%
IA £ Strategic Bond 4.5% -0.4% -1.4% 11.5% 11.7%

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


Global Bond – Annual percentage growth

Jul 16 -
Jul 17
Jul 17 -
Jul 18
Jul 18 -
Jul 19
Jul 19 -
Jul 20
Jul 20 -
Jul 21
M&G Global Macro Bond 2.9% -1.7% 4.7% 13.6% -0.6%
IA Global Mixed Bond 2.2% -1.0% 0.2% 9.8% 6.3%

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


Corporate Bond – Annual percentage growth

Jul 16 -
Jul 17
Jul 17 -
Jul 18
Jul 18 -
Jul 19
Jul 19 -
Jul 20
Jul 20 -
Jul 21
M&G Strategic Corporate Bond 3.3% -0.9% -1.0% 11.2% 11.1%
IA £ Corporate Bond 2.9% -0.5% -0.1% 13.5% 9.0%

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

More on Bonds sector performance, fund reviews and research


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    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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