Bond fund industry review – what’s next for bonds?

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2022 begins in an uncertain context for bond investors. While bond yield prospects may not be as bright as they once were, that doesn’t mean they should be put aside – they can still play an important role in diversifying a portfolio.

In this article, we take a look at bond market headlines, share our outlook for the bond market, and review how some of our Wealth Shortlist funds have fared.

This article is not personal advice. If you are unsure whether an investment is right for you, please seek financial advice. All investments and any income they produce may go up or down in value, so you may get back less than you invested. Past performance is also not indicative of future returns.

What’s new on interest rates and inflation?

The coming year will be tricky for central banks. Two important and serious challenges await them in the coming months. One is the potential impact of the Omicron variant and the impact on the economy and growth. Then there are the consequences of relatively high and more rigid than expected inflation.

In the United States, inflation hit 7% in December 2021 as falling energy costs were not enough to offset rising costs for basics like food, rent and cars. This is well above the US Federal Reserve (FED) target of 2%.

In the UK the numbers are different, but we are in a similar position. Inflation reached 5.4% in December, well above the Bank of England’s (BoE) target. However, the BoE raised rates to 0.5% at its February meeting. The bank also lowered the growth rate of the British economy by around 0.5% for the months of October, November and December. That would still leave the economy at around 1.5% of its pre-pandemic level.

What rate hikes are expected?

Capital Economics economists expect four 0.25% rate hikes from the US Federal Reserve during the year. In the UK, they expect the BoE to raise rates to 1.25% by the end of the year. It is generally expected to be a number of small increases rather than just one, which will give people time to adjust.

A rate hike is usually good news for savers who could get a better rate. But that’s not good news for borrowers who haven’t fixed the rate they’ll pay. Or for bond investors, because rising interest rates 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, which reduces the demand for goods and services. This helps control price increases. However, if rates rise too quickly, this could derail the recovery achieved so far by affecting investment and growth.

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. Both funds invest in higher yielding bonds that carry higher risk.

Last year’s best performing Wealth Shortlist bond fund was Artemis High Income. The fund returned 4.21%*, compared to -0.44% for the sector average of its peer group IA £ Strategic Bond. Remember, however, that past performance is not indicative of the future.

After a change of fund manager, it is now managed by David Ennett and Jack Holmes, with Ed Legget remaining on the equity portion of the portfolio. We recently wrote an update on why we kept the fund on the Wealth Restricted List.

Find out more about Artemis High Income charges included

Artemis High Income Key Investor Information

The worst performing Wealth Shortlist bond fund over the past 12 months has been the iShares Corporate Bond Index. The fund returned -4.77%, compared to -3.49% for the sector average of the IA £ Corporate Bond peer group. As always, past performance is not indicative of the future.

The fund offers a simple way to invest broadly in the UK corporate bond market. It can help diversify a portfolio focused on stocks or other types of investments, or fit into a more conservative portfolio.

Learn more about the iShares Corporate Bond Index, including fees

Artemis High Income Key Investor Information





Annual performance growth
January 17 –

January 18
January 18 –

January 19
January 19 –

January 20
January 20 –

January the 21st
January the 21st –

January 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 indicative of the future. Source: *Lipper IM, as of 01/31/2022.





Annual performance growth
January 17 –

January 18
January 18 –

January 19
January 19 –

January 20
January 20 –

January the 21st
January the 21st –

January 22
iShares Corporate Bond Index 4.94% 0.73% 10.65% 4.01% -4.77%
IA Corporate Bonds £ 5.42% -0.16% 10.37% 4.44% -3.49%

Past performance is not indicative of the future. Source: *Lipper IM, as of 01/31/2022.

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