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Bond funds sector review – where next for bonds?

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.

2022 begins with an uncertain backdrop for bond investors. While the outlook for bond returns might not be as bright as it’s been before, that doesn’t mean they should be cast aside – they can still play an important role in helping diversify a portfolio.

In this article, 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.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, please ask for financial advice. All investments and any income they produce can rise as well as fall in value, so you could get back less than you put in. Past performance also isn’t a guide to future returns.

What’s the latest on interest rates and inflation?

It’s going to be a tricky year ahead for central banks. There are two significant and serious challenges staring them down in the months ahead. One is the potential impact of the Omicron variant and the knock-on impact on the economy and growth. Then there’s the consequences of relatively high and stickier than expected inflation.

In the US, inflation hit 7% in December 2021, with a drop in energy costs not enough to offset rising costs for staples like food, rent and cars. This is well above the US Federal Reserve’s (FED) 2% target.

In the UK the numbers are different, but we’re in a similar position. Inflation hit 5.4% in December – well above the Bank of England’s (BoE) target. The BoE did however raise rates to 0.5% in their February meeting. The bank also downgraded how much they expect the UK economy to grow by for the months covering October, November and December by around 0.5%. This would still leave the economy around 1.5% off its pre-pandemic level.

What rate rises are expected?

Economists at Capital Economics expect four rate rises of 0.25% from the US Federal Reserve over the course of the year. In the UK they expect the BoE to raise rates to 1.25% by the end of the year. It’s widely expected that these will be a number of small rises instead of one big one, giving people time to adjust.

A rate rise is usually good news for savers who might be able to get a better rate. But it’s not such good news for borrowers who haven’t fixed the rate they’ll pay. Or for bond investors as interest rates rises usually mean falling bond prices.

Ultimately, higher interest rates make it more expensive to borrow money. This encourages people to save more and therefore spend less in the economy, lowering demand for goods and services. This helps keep price rises in check. However, if rates go up too quickly, it could derail the recovery achieved so far by hitting investment and growth.

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.

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.

For more details on each fund and its risks, please see the links to their factsheets and key investor information below. Both funds invest in high-yield bonds which are higher risk.

The best performing Wealth Shortlist fixed income fund over the last year was Artemis High Income. The fund returned 4.21%* compared with -0.44% for its IA £ Strategic Bond peer group sector average. Remember though, 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 on why we’ve kept the fund on the Wealth Shortlist.

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 iShares Corporate Bond Index. The fund returned -4.77%, compared with -3.49% for the IA £ Corporate Bond peer group sector average. As always, past performance is not a guide to the future.

The fund offers a simple way to invest broadly across the UK corporate bond market. It can help diversify a portfolio focused on shares or other types of investment, or fit alongside a more conservative portfolio.

More about iShares Corporate Bond index including charges

Artemis High Income Key Investor Information

Annual performance growth
Jan 17 -
Jan 18
Jan 18 -
Jan 19
Jan 19 -
Jan 20
Jan 20 -
Jan 21
Jan 21 -
Jan 22
Artemis High Income 8.60% -3.06% 8.7% 1.33% 4.21%
IA £ Strategic Bond 4.87% -0.85% 8.89% 4.51% -0.44%

Past performance is not a guide to the future. Source: *Lipper IM, to 31/01/2022.

Annual performance growth
Jan 17 -
Jan 18
Jan 18 -
Jan 19
Jan 19 -
Jan 20
Jan 20 -
Jan 21
Jan 21 -
Jan 22
iShares Corporate Bond index 4.94% 0.73% 10.65% 4.01% -4.77%
IA £ Corporate Bond 5.42% -0.16% 10.37% 4.44% -3.49%

Past performance is not a guide to the future. Source: *Lipper IM, to 31/01/2022.

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    Our fund research is for investors who understand the risks of investing and that 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.

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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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