Quarterly bond fund review – growth, inflation and interest rates are all on the minds of investors

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In recent months, bond markets have been dominated by discussions of whether the economic recovery will continue, inflation continues to rise, and when to reverse monetary policy support.

Let’s start with the first of those here in the UK. The Office for Budget Responsibility expects the UK economy to return to pre-pandemic levels at the start of the year and estimates its GDP growth forecast will reach 6.5% by 2021.

These expectations are supported by the success of the vaccine, as well as the good adaptation of consumers and businesses to public health restrictions. Some growth forecasts are even higher. Capital Economics estimates GDP growth of 6.8% for the same period.

This relatively strong rebound was not easy, however. Supply constraints in different industries, labor shortages, rising energy prices and difficulty adjusting to post-Brexit changes have all posed challenges. These factors threaten to lead to an unbalanced recovery.

Average annual GDP growth (2000-2017) 2021 annual GDP growth forecast Average annual inflation (2000-2017) Annual inflation forecast 2021
UK 2.1% 6.8% 2.0% 2.4%
United States 2.2% 5.6% 2.2% 4.4%
Eurozone 1.3% 5.3% 1.7% 2.5%
China 8.0% 8.0% 2.6% 1.0%

Source: Capital Economics as of 10/27/2021

Inflation has reached multi-year highs in the United States and the euro area as well as in the United Kingdom. Many expected inflation to rise as the economic recovery accelerates. But there has been a significant debate over whether this period of higher inflation will be temporary or here to stay.

Some economists are now worried that the UK is entering a period of ‘stagflation’. This is where economic growth slows and prices rise. If so, it could slow the outlook for next year.

Central banks, such as the Bank of England (BOE) and the US Federal Reserve, have made it clear that a rise in inflation should be temporary. But more recently, we’ve seen a change in tone.

BOE Governor Andrew Bailey still believes the rise in inflation will be temporary. But it could last longer than expected and the BOE is expected to respond to the surge in prices.

Any potential rate hike is usually good news for savers and bad news for borrowers who haven’t fixed the interest rate on their loans. But if rates rise too quickly, it could derail the recovery achieved so far. Thus, the BOE could take a little longer to assess things such as how the labor market is coping with the end of the leave scheme.

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

Bonds, inflation and interest rates – what it all means for investors

What did the research team do?

During the last quarter, we had several video calls with various fixed income managers, including Stuart Edwards and Julien Eberhardt of Invesco Tactical Bond. We have since decided to keep the fund on the Wealth Shortlist following the retirement of longtime manager Paul Causer at the end of 2021. You can read more about the reasons in our latest update.

Learn more about Invesco Tactical Bond, fees included

Key investor information Invesco Tactical Bond

We also had a video call with Stephen Snowden and Juan Valenzuela from Artemis Strategic Bond. This followed the departure of James Foster and Alex Ralph. We place great importance on the experienced duo, so we were disappointed to see them leave after delivering good performance to patient investors. After these manager changes, we removed the fund from the Wealth Shortlist, you can read our rationale in our latest update.

Although we have removed Artemis Strategic Bond from the Wealth Shortlist, this is not a recommendation to make changes to a portfolio. Investors should ensure that all investments match their investment objectives and attitude to risk. If you are not sure whether an investment is right for you, seek financial advice.

Learn more about Artemis Strategic Bond, fees included

Artemis Strategic Bond Key Investor Information

In October, we caught up with Kris Atkinson of Fidelity MoneyBuilder Income for an update on the fund’s positioning and performance. Atkinson thinks it’s time to be cautious given the low level of compensation available for investing in certain bonds. However, he still sees value in some asset-backed bonds issued by companies in sectors affected by Covid.

Learn more about Fidelity MoneyBuilder Income including fees

Key Investor Information of Fidelity MoneyBuilder Income

How have our Wealth Shortlist bond funds performed?

Our selections of Wealth Shortlist bonds have experienced mixed performances over the past year. However, we wouldn’t expect them to all behave the same. If all of your funds in one industry are performing well at the same time, they are likely investing in similar areas.

We believe it is important for investors to build a portfolio made up of managers with different investment styles and approaches. This should improve the chances for investors to perform well in the long run.

All investments fall as they rise in value, so you might get back less than what you invested. For more details on each fund and its risks, please see the links to their fact sheets and key investor information below.

Investing in funds is not for everyone. Investors should only invest if the fund’s objectives are aligned with theirs and 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.

The best performing Wealth Shortlist bond fund over the past year has been Artemis High Income with a strong return of 11.95% *. It was well ahead of its benchmark, the peer group IA £ Strategic Bond which gained 4.40%. Past performance is no guarantee for the future. After a change of fund manager, it is now managed by David Ennett and Jack Holmes, Ed Legget remaining on the equities part of the portfolio. We recently wrote an update to provide more details on these changes.

Learn more about Artemis High Income, including fees

Key investor information Artemis High Income

The worst performing Wealth Shortlist bond fund over the past 12 months has been the M&G Global Macro Bond fund, with a return of -6.21% *. That’s behind the fund’s benchmark, the peer group average IA Global Mixed Bond, which lost 0.92% over the same period.

The fund had less credit risk than some other funds. Fund manager Jim Leaviss is a very experienced bond investor with a solid track record. We believe his fund has the potential to perform well over the long term.

Find out more about M&G Global Macro Bond, including fees

Key investor information M&G Global Macro Bond

Strategic obligation – annual percentage growth

October 16 – October 17 October 17 – October 18 October 18 – October 19 October 19 – October 20 October 20 – October 21
High income artemis 9.98% 1.16% 4.61% 2.42% 11.95%
Strategic obligation Artemis 7.57% 0.31% 5.58% 3.82% 2.99%
Tactical obligation Invesco 3.28% 0.84% 3.18% 9.78% 5.42%
IA £ Strategic Obligation 4.82% 1.15% 7.46% 3.21% 4.38%

Past performance is no guarantee for the future. Source: * Lipper IM, as of 10/31/2021.

Global Mixed Bonds – Annual Percentage Growth

October 16 – October 17 October 17 – October 18 October 18 – October 19 October 19 – October 20 October 20 – October 21
M&G Global Macro Bonds 5.12% 0.72% 7.47% 9.20% -6.21%
IA Global Blended Bond 0.23% 1.02% 6.79% 3.90% -0.93%

Past performance is no guarantee for the future. Source: * Lipper IM, as of 10/31/2021.

Corporate bond – annual percentage growth

October 16 – October 17 October 17 – October 18 October 18 – October 19 October 19 – October 20 October 20 – October 21
Fidelity MoneyBuilder Income 3.39% 0.16% 8.52% 4.03% 2.21%
IA Corporate Bond £ 4.51% 0.19% 8.54% 4.64% 1.14%

Past performance is no guarantee for the future. Source: * Lipper IM, as of 10/31/2021.

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