Bond fund industry review – a devastating quarter for bond investors

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Bonds continued their downward spiral over the last quarter, with the UK market particularly impacted by the defunct “mini-budget” at the end of September. The losses were extreme, especially for an asset class that is supposed to provide some stability to investors’ portfolios.

What’s the latest on UK interest rates and inflation?

Inflation remains stubbornly high, standing at 10.1% in September. The introduction of the Energy Price Guarantee, designed to keep the cost of the average annual household energy bill at around £2,500, has helped to stem this increase. However, that hasn’t helped businesses, where the only way to try to survive has been to raise prices.

This prompted the Bank of England (BoE) to continue raising interest rates, with the latest 0.75% hike being the biggest in 30 years. This brings the current base rate to 3%, the highest since 2008. Interest rate increases have not only taken place in the UK. The US Federal Reserve and European Central Bank also raised rates by 0.75% recently.

There is still some debate about where inflation and interest rates go from here. Many believe that inflation will start to fall in 2023, notably the BoE, but it is unclear when and by how much. The same can be said for interest rates. Most expect these to peak at some point in 2023. But the level of the peaks and how long rates will need to stay there to keep inflation under control are also unknowns.

The only thing that is almost certain is that the UK will enter a recession in 2023. The latest opinion from the BoE is that the recession is approaching, with the potential for it to be the longest since World War II. The seriousness of the situation depends on the degree to which interest rates must rise to bring inflation under control.

This article is not personal advice. If you are unsure whether an investment is right for you, please seek financial advice.

What is happening in the bond market?

The combined impact of inflation, rising interest rates and recession expectations has been devastating for bonds. The average sector performance over the quarter for the IA UK Gilts, IA £ Strategic Bond and IA £ Corporate Bond sectors was -11.48%, -5.98% and -8.96% respectively.

To put these falls into context, we looked at how often these industry averages fell more than 5% over a three-month period from the end of 2001 to the end of 2021. The IAs UK Gilts, IA £ Strategic Bond and IA £ Corporate bond sector averages had only five, four and three such periods respectively. The number of three-month periods included in this analysis is 239.

What bond investors have experienced in the last quarter and throughout 2022 is rare in recent history.

Just because it has been historically rare doesn’t mean it won’t happen again, given the high inflation and rising interest rate backdrop noted earlier.

Due to these losses and rising interest rates, bond yields have risen significantly throughout 2022 and this trend has continued into the final quarter. The yield on the UK 10-year gilt rose from 1.84% at the start of August to 3.7% at the end of October. Other bond yields rose in similar proportions. Bond yields are not, however, a guarantee of future income, they are just a snapshot in time.

With the yields currently offered, bonds look more attractive in terms of the income they offer in the future than they have in recent years. Of course, nothing is guaranteed.

For investors who need income and have a longer time horizon (at least five years), the outlook for investing in bonds is likely better than it has been for some time. However, the potential for further price declines and volatility remains, especially in the near term. Remember that past performance is not indicative of future returns.

How have our fixed income Wealth Shortlist funds performed?

Our Wealth Shortlist bond selections have performed mixed over the past year. Some have outperformed their peer group, and others have underperformed. However, we wouldn’t expect them all to work the same way. If all of your funds in one sector are performing well at the same time, they are likely investing in similar areas. Remember that 12 months is a short period when looking at the performance of an investment. Past performance is not indicative of the future.

Investing in funds is not for everyone. Investors should only invest if the fund’s objectives are aligned with their own and if there is a specific need for the type of investment being made. Investors should understand the specific risks of a fund before investing and ensure that any new investment is 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.

Last year’s best performing Wealth Shortlist bond fund was M&G Global Macro Bond, returning -4.35%*.

Jim Leaviss and Eva Sun-Wai begin with a “broader” macroeconomic perspective. This includes forming a view on economic growth, interest rates, and inflation globally. This then helps them decide how much to invest in different areas of the bond market and in different currencies.

Leaviss has historically made good use of the flexibility available to it in the fund to deliver strong returns to investors. We believe that experience is essential for a manager of this type of fund and Leaviss is one of the most experienced bond fund managers in the UK.

The fund’s exposure to the US dollar helped performance over the past quarter. The managers adopted a defensive positioning, due to concerns about inflation and rising rates, which also helped keep losses lower than their peers. But the bonds they hold have further lost value.

LEARN MORE ABOUT M&G GLOBAL MACRO BOND, INCLUDING FEES

M&G GLOBAL MACRO BOND KEY INFORMATION FOR INVESTORS

The worst performing Wealth Shortlist bond fund over the past 12 months was the Legal & General All Stocks Gilt Index, returning -21.67%* over the period.

The fund offers a simple way to invest in UK government bonds across all maturities. It can help diversify a portfolio focused on stocks or other types of investments. Inflation and rising interest rates caused the fund to lose money over the period. Being a passive fund, the performance is not due to the manager’s decisions.

LEARN MORE ABOUT THE LEGAL AND GENERAL INDEX OF ALL GILT STOCKS INCLUDING FEES

KEY INVESTOR INFORMATION








Annual percentage growth
October 17 –

October 18
October 18 –

October 19
October 19 –

October 20
October 20 –

21st of October
21st of October –

October 22
M&G Global Macro Bond 0.72% 7.47% 9.20% -6.21% -4.35%
IA Global Blend Bonds -1.02% 6.79% 3.90% -0.94% -10.89%

Past performance is not indicative of the future. Source: *Lipper IM, as of 10/31/2022.

Past performance is not indicative of the future. Source: *Lipper IM, as of 10/31/2022.

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Our fund search is for investors who understand the risks of investing and know that investing in funds is not for everyone. Investors should only invest if the fund’s objectives are aligned with their own and if there is a specific need for the type of investment being made. Investors should understand the specific risks of a fund before investing and ensure that any new investment is part of a diversified portfolio.

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