Bond funds that won’t hit the buf­fers

The Daily Telegraph - Your Money - - YOUR MONEY -

In­ter­est rate rises pose a threat to all bond in­vestors, but some funds de­liver a high level of in­come and are bet­ter placed to weather any hikes. When cen­tral banks raise in­ter­est rates, bonds yield­ing lower amounts be­come less at­trac­tive, caus­ing their price to fall. Bond mar­kets have been on an un­prece­dented multi-decade run, as in­ter­est rates have edged down­wards for the past 30 years. Now, Amer­ica has be­gun rais­ing in­ter­est rates, and the Bank of Eng­land only nar­rowly voted in favour of keep­ing Bank Rate at 0.25pc in its last meet­ing.

This is wor­ry­ing ter­ri­tory for bond in­vestors, who have been able to rely on share-level re­turns with far less risk. The ma­jor risk when rates rise comes from bond “du­ra­tion”. This is not the length of time a bond has un­til ma­tu­rity, but a mea­sure of how sen­si­tive bonds are to changes in in­ter­est rates.

If a bond has a du­ra­tion of three years, that means its cap­i­tal value is ex­pected to fall by 3pc for ev­ery 1pc in­crease in in­ter­est rates. The larger the du­ra­tion, the greater the risk in­ter­est rates pose – so at present, many fund man­agers are fo­cus­ing on shorter du­ra­tion bonds.

To help pro­tect against shocks in­vestors should spread their money across dif­fer­ent types of bond. Alex Dry­den, at JP Mor­gan As­set Man­age­ment, said in­vestors should also spread across coun­tries, as UK bond hold­ers typ­i­cally have around 50pc of their money in the UK. He sug­gested ar­eas such as debt is­sued by emerg­ing mar­ket coun­tries could help to “cush­ion the blow of ris­ing in­ter­est rates”.

How­ever, Mr Dy­den said the out­look for bond in­vestors looks tricky: “Cen­tral banks in­ject­ing money was de­signed to boost as­set prices to­day at the sac­ri­fice of fu­ture re­turns. It would ap­pear for bond in­vestors that the time has come to pay the piper.”

Tele­graph Money asked two fund pick­ing ex­perts for the funds that are best placed to with­stand rate rises.

Twen­tyFour Dy­namic Bond Yield: Charge:

5pc 0.78pc This fund is more than 50pc in­vested in Bri­tain and Amer­ica, with the rest spread around Europe. Around 11pc is in­vested in UK and US gov­ern­ment debt, with 25pc in bank bonds, 13pc in Euro­pean high-yield bonds and 13pc in in­sur­ance com­pany bonds.

David Lewis, man­ager of the Jupiter Mer­lin multi-as­set funds, said that this fund and the other Twen­tyFour fund be­low have a short two to three-year typ­i­cal du­ra­tion.

Twen­tyFour Global Un­con­strained Bond Yield: Charge:

4.5pc

0.74pc This fund can in­vest in a wide range of bond types and re­gions, mean­ing the man­agers can move into ar­eas less at risk from in­ter­est rates – it also has the abil­ity to take “short” po­si­tions, bet­ting against the mar­ket or spe­cific bonds. Cur­rently, it is 35pc in­vested in Europe, 32pc in the UK and 21pc in North Amer­ica. Bank bonds are 24pc, bonds made up of mort­gages and other such debt are 16pc, and gov­ern­ment bonds are 15pc. There is also 7pc in emerg­ing mar­ket debt.

Royal Lon­don Short Du­ra­tion Credit Yield:

3.6pc

Charge:

0.39pc More than 70pc of this fund’s bonds ma­ture in less than five years, and it is around 80pc in­vested in the UK. Top hold­ings in­clude the debt of top in­vest­ment trusts, such as Ed­in­burgh and Tem­ple Bar, as well as the bonds of ci­garette firm Im­pe­rial Brands and bank­ing gi­ant HSBC. Ryan Hughes, of AJ Bell, the fund shop, said: “The team, led by Paola Binns are highly ex­pe­ri­enced and the fund has a lower turnover than many.”

Ris­ing in­ter­est rates are gen­er­ally bad news for bond port­fo­lios, but not for these, says James Con­ning­ton

Her­mes Mul­tistrat­egy Credit Yield: Charge:

3.8pc

0.82pc Mr Lewis said this fund, which only launched in 2014, in­vests in high­yield and high-qual­ity bonds but keeps du­ra­tion at two to three years.

It is 26pc in­vested in North Amer­ica, 14pc in Western Europe, 12pc in the UK, and 12pc in Latin Amer­ica. Top hold­ings in­clude Gen­eral Mo­tors, Air­bus, Volk­swa­gen and Tesco bonds.

‘It would ap­pear for most bond in­vestors the mo­ment of reck­on­ing is near’

M&G Strate­gic Cor­po­rate Bond Yield: Charge:

3pc

0.66pc Mr Lewis said this fund has 90pc in in­vest­ment grade bonds – re­quir­ing a top qual­ity rat­ing.

The du­ra­tion is longer, at around six years, but he said that the higher qual­ity pro­vides a level of pro­tec­tion, and “means they have the po­ten­tial to rise if shares fall”.

The £3.6bn fund is 44pc in­vested in the UK and 28pc in Amer­ica. Top hold­ings in­clude bonds from Mi­crosoft, Bank of Amer­ica and Lloyds.

Gen­eral Mo­tors, whose Chevro­let divi­sion man­u­fac­tures cars that com­pete in Nas­car, is one of the bonds to help weather rate

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