Interactive Investor

Consistently great bond funds - Premier League 2014 annual review

12th November 2014 12:10

Rebecca Jones from interactive investor

Sterling Strategic Bond sector: Artemis High Income

Managed By: Adrian Frost, Adrian Gosden and Alex Ralph

Artemis High Income has a strong pedigree. Launched in 1995, the strategic bond fund is one of the longest-running fixed income vehicles of its kind, reflected in the £1 billion of assets it now has under management.

Run by the highly experienced Adrian Frost and Adrian Gosden, it has performed well over the past three years to 1 September.

This is due in large part to a strong 2012 and 2013, when the fund returned 22 and 13% respectively.

With close to 130 holdings the fund is well diversified: 57% of the portfolio is invested in UK fixed income and the remainder largely in European bonds such as the fund's 10th largest holding, German electric utilities company RWE AG.

In line with the rules of the strategic bond sector, the managers also have close to 20% invested in equities, again with the UK the largest regional exposure at 12% of the portfolio, followed by Europe at 3% and North America at 1.2%.

The fund's largest sector exposure is to banks and financial services, where more than 30% of the portfolio is invested.

The biggest holdings include F&C Finance, Legal and General, Standard Life and Investec Bank. However, the managers' single largest investment is in a short-term UK gilt, at a hefty 4.2% of the total portfolio.

The managers have also recently taken a large punt on British Gas owner Centrica, as, Frost says, a poor set of results and an impending Competition Commission investigation created a buying opportunity: the firm is now the fund's second-largest holding at 2.5% of the portfolio.

Sterling Corporate Bond sector: Kames Investment Grade Bond

Managed By: Euan McNeil and Stephen Snowdon

Knocking Royal London Ethical Bond fund out of the league is Kames Investment Grade Bond fund, thanks to stronger performance in the year to 1 September 2012, when the fund returned 13.7% compared to 11.6% from Royal London.

In the three years to 1 September, Kames' £873 million fund has delivered the second highest returns in the 77 fund-strong sterling corporate bond sector, a performance manager Euan McNeil attributes to the fund's "high conviction" investment style.

"We are known for being very active and running with relatively concentrated portfolios. If we own a name in our fund we like to own it in enough size to make a difference and if we don't like it, we just don't own it; there's no sense in owning something just for the sake of it," he says.

McNeil has his biggest weighting in financial bonds, which occupy 43% of his 134-holding portfolio. Insurers, rather than banks, are preferable as, the manager says, they tend to offer "just as much value" with less volatility. The largest of these holdings is Allianz, which occupies 2.75% of the portfolio.

This, says McNeil, exemplifies his approach to bond investing: "We're not afraid to look at unpopular names if we think the valuation more than compensates us. You don't make money from owning bonds everyone else likes, so you do occasionally have to take a contrarian position," he says.

McNeil says that he expects stock selection to play an important role in the performance of the fund from here on, as the "macro drivers" that have led to the bond rally of the past few years disappear; it's an environment that he believes will "suit" his "style".

Global Bonds sector: Aberdeen Global Select Global Credit Bond

Managed by: Aberdeen Global Credit Team

Aberdeen Global (AG) Select Credit Bond fund enters our league in the global bonds category, which we have re-introduced to the Premier League following a one-year absence. The sector has been readmitted as the creation of the global emerging market bond sector in January has removed those funds whose naturally high levels of volatility were skewing the overall sector average.

Returning more than double that of the global bonds sector in the three years to 31 August, the £51.3 million AG Global Select Credit Bond fund enters the league on a high, following a disappointing period between 2009 and 2011 when it was bottom quartile two out of three years.

According to Aberdeen, the fund has the flexibility to invest in sovereign, corporate investment grade and sub-investment grade issuers from both developed and developing markets. Currently, the fund's largest exposure is to North America at more than 60%, followed by Europe at 30%, with the remaining 10% spread in Australia and emerging markets.

Government bonds are prevalent throughout the portfolio: five of the fund's top 10 holdings are invested in US and German government debt. However, the fund's largest weighting is in industrial bonds, closely followed by financial bonds, exemplified by top 10 holdings in Société Générale and Spanish bank Kutxabank.

On its team approach, Aberdeen says: "The portfolio is in essence a product of the most attractive opportunities identified by our investment teams around the world."

*To view our consistent Premier League stars, and for a snapshot of how they have performed over the past three years, click through using the links below.

Browse Money Observer's Nov 2014 Premier League review

Introduction

UK equity funds

Global equity funds

UK and global bond funds

Regional equity funds

Mixed assets funds