Selection of 50 fixed income funds in focus


THE The $ 100,000 billion bond market is by far the largest of all asset classes,1 yet, it is a problem that many investors avoid due to its perceived complexity compared to stocks.

It is true that bonds can be tricky, but there is also a lot of potential in this market. Here we take a look at the weird and wonderful world of bonds via our experts ’50 favorite funds – a list of our expert analysts’ most convinced picks out of all the Fidelity and third-party funds on the personal investment platform.

How they work

A bond is a loan made between a lender who buys the bond (i.e. the investor) and a borrower who issues it – usually a government or a company seeking to raise capital. The lender receives an annual interest payment, called a coupon, before receiving the full amount when the bond matures.

The interest paid by a bond will depend on the risk associated with holding it. Various factors come into play here, but foremost among them is the risk that the bond issuer will default on their loan – that is, the company or government you are lending to cannot afford to reimburse you.

Large swathes of credit analysts are employed to determine the likelihood that a bond issuer will default. They tend to classify bonds into one of two categories: “investment grade” bonds are on the safer side of the spectrum and “high yield” or “junk” bonds are the riskiest.

Government bonds

Generally speaking, governments are considered to be less risky issuers than companies. The likelihood that the US Treasury, for example, will default on your loan is relatively low.

That’s not to say government bonds are necessarily a safe bet. Those issued by volatile or emerging markets may present their own risks.

The Colchester Global Bond Fund is quite unique in that it invests exclusively in government debt. He sticks to keeping things low risk by focusing on high grade and premium bonds. But while quality is paramount, generating significant returns is also key to their goals. Managers look to smaller markets where they believe they can find the best value.

Corporate bonds

While corporate bonds have traditionally been viewed as riskier than government bonds, again there is a lot of room for divergence.

Fidelity MoneyBuilder Income Fund and M&G Corporate Bond Fund are both examples of corporate bond funds that focus on controlling risk.

Sajiv Vaid, manager of Fidelity MoneyBuilder Income Fund, believes that investing in high quality corporate bonds can be the “sweet spot” of fixed income securities. He finds that he can take advantage of the potentially higher returns offered by corporate debt while keeping risk under control thanks to the quality of the issuers.

Likewise, Richard Woolnough, manager of the M&G Corporate Bond Fund, likes to focus on the less risky aspects. It allocates at least 70% of its portfolio to investment grade bonds, with exposure to high yield bonds limited to 5%.

Relatively low risk funds like these come with a trade-off. The lower the risk of an investment, the lower the returns you can generally expect. A company that offers a high risk bond will generally offer higher interest payments to offset the additional risk posed to investors.

This is where Invesco High Yield and JPM Global High Yield Bond funds can appeal. As the name suggests, both funds focus on the high yield market. This means that the bonds they buy are riskier, but the interest investors receive on those bonds should also be higher.

Both funds invest at least 80% of their portfolios in lower quality bonds, although the Invesco High Yield Fund invests in government bonds as well as corporate bonds.

“Master key” obligations

Some managers are allowed to explore various parts of this large market. They can invest in all ranges of risk, from high yield investment grade, government and corporate bonds and other forms of debt securities such as derivatives.

One such fund is Fidelity Strategic Bond Fund. The “strategic” part of its name tells you that managers can “go anywhere” in the fixed income universe to achieve their goals of providing regular income and preserving capital with low volatility.

Similar levels of flexibility are shown in the M&G Optimal Income Fund, which is another M&G Select 50 fund managed by Richard Woolnough.

He is not required to invest in specific parts of the market where returns could be correlated with what is happening in the business cycle. The flexibility of this fund is such that Woolnough is even able to invest part of its holdings in stocks if they look attractive relative to bonds.

Fidelity and M&G funds use this flexibility to improve returns for investors. But it’s important to note that more freedom doesn’t necessarily come with additional risk.

The PIMCO Global Bond Fund similarly invests in a wide range of fixed income investments, including corporate and government bonds from developed and emerging markets, as well as inflation-linked bonds (over ‘information on those below).

However, this fund uses its diversified sources of income as a means of managing risk, not increasing it. The idea is that by investing in a wide range of income sources, you are spreading your eggs across multiple baskets instead of relying on just one. This means that you are less dependent on a part of the market to generate returns.

Inflation-linked bonds

Ready to invest? Hold the fire.

So far, the only risk we’ve considered is the risk of default – the potential for the issuer not to pay back their loan in full.

Unfortunately, there are others to consider. Due to the nature of the fixed interest they pay, bonds are particularly vulnerable to changes in the macroeconomic environment. Specifically, if interest rates rise over the life of a bond, the fixed interest rate on your bond will appear less attractive in relative terms than it was when you bought it. . This means that an increase in rates will negatively affect the value of your bond, and vice versa.

Naturally, bond investors seek to anticipate any change in interest rates before they happen. This means that they spend a lot of time monitoring inflation expectations, since interest rates react to inflation. If inflation rises, interest rates may follow suit.

But that’s not all. Inflation poses its own direct risk for bonds. Inflation threatens to devalue the fixed interest you earn on your bond – if prices rise, the payment you receive will fall in real (i.e. inflation-adjusted) terms.

Fortunately, all is not pessimistic. Where most bonds quiver at the sound of rising prices, inflation-linked bonds actively embrace them. For these bonds, the interest rate and the final repayment amount they pay are linked to the rate of inflation. This means that if inflation rises, your returns will rise as well.

The ASI Global Inflation-Linked Bond Fund invests exclusively in such bonds. This could make a good fund for investors who are leery of inflation but still look for bonds as a way to diversify their portfolio. Here’s Adam Skerry, manager of ASI Global Inflation-Linked Bond Fund, explaining how his fund works:


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