Bond fund industry review – period of volatility for bonds

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Bond investors have had a rough ride over the past quarter, continuing the rough ride so far this year.

Inflation continues to rise, causing an uncomfortable squeeze in the cost of living for many. The result has been higher interest rates and the UK is now expected to enter recession towards the end of 2022.

This article is not personal advice. If you are unsure whether an investment is right for you, please seek financial advice. If you choose to invest, the value of your investment will rise and fall, so you may get back less than you invested.

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

In the UK, inflation reached 10.1% in the year to August, and is expected to continue to rise.

This rate is well above the inflation target of 2% set by the Bank of England. As a result, interest rates have risen from 1% in May to 1.75% now. This is still low by historical standards, although further rate hikes are expected before the end of the year.

High inflation is normally bad news for bonds because the actual returns earned are reduced as most bonds pay fixed returns. Also, the value of bonds tends to fall as interest rates rise because people can earn more by keeping their money in savings accounts. While prices are rising across the board, it is food and energy price hikes that hurt the most. A recent high-profile example is McDonald’s raising the price of its cheeseburger from £0.99 to £1.19, an increase of 20%. The last time they raised the price of a cheeseburger was 14 years ago.

Energy prices have also risen significantly, which should put additional pressure on consumers when the energy price cap comes into effect in October. Even with government supports, this will mean less money for people to spend on goods and services.

As many of the drivers of these price increases are global in nature (inflation in the Eurozone is currently at 8.9% and in the US at 8.5%), it is difficult for the UK to fight it alone.

What is happening in the bond market?

From early May to mid-June, bonds sold across the board, largely due to the US Federal Reserve (FED) raising interest rates at a faster than expected pace.

Since then, bonds have rallied. Investors are hoping that while there are more to come, the bulk of those rate hikes have now been implemented.

As a result, most bond values ​​at the end of July are only slightly lower than at the end of April, although the course has been volatile.

The biggest concern now is the recession. A recession occurs when the economy contracts for two consecutive quarters.

As the economy shrinks, businesses often make less profit and the government receives less tax. This can make it harder for the government to spend money on all of its priorities and, more often than not, it makes tough decisions.

Recessions are defined slightly differently in the United States, with some broader factors taken into account. But consistent with the above, the US has already entered a technical recession after two quarters of negative growth in the first half of the year. The FED had hoped to be able to calm inflation without causing a recession, but historically this has proven to be an almost impossible task.

In the UK, the most recent comments from the Bank of England suggest that the UK will not only enter a recession towards the end of 2022, but that it could last until the end of 2023 or the beginning of 2024.

This can have different effects on different types of bonds. Certain government bonds, such as those issued by countries such as the UK and the US, often have a better chance of retaining or increasing their value because they are considered “safer” investments. However, riskier corporate bonds could suffer, as the chances of companies not being able to repay their debts are higher during a recession.

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.

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.

Past performance is not indicative of the future.

Last year’s best performing Wealth Shortlist bond fund was M&G Global Macro Bond with a return of -1.81%*.

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 has supported performance over the past 12 months. The managers adopted a defensive positioning, due to concerns about inflation and rising interest 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 -14.37%** 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
July 17 –

July 18
July 18 –

July 19
July 19 –

July 20
July 20 –

July 21
July 21-

22nd of July
M&G Global Macro Bond -1.16% 12.15% 5.96% -6.14% -1.81%
IA Global Blend Bonds -0.53% 7.35% 2.40% 0.39% -7.56%

Past performance is not indicative of the future. Source: *Lipper IM as of 07/31/2022.





Annual percentage growth
July 17 –

July 18
July 18 –

July 19
July 19 –

July 20
July 20 –

July 21
July 21-

22nd of July
Legal and General All Stocks Gilt index 0.83% 6.70% 10.03% -4.39% -14.37%

Past performance is not indicative of the future. Source: **Lipper IM as of 07/31/2022.

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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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