It may be hard to believe, but there was once a time when you could get an attractive yield of 4%+ from cash savings or government bond investments.
But those halcyon days of being able to rely on ‘risk-free’ assets are now a thing of the past and unlikely to return anytime soon. The best three-year fixed cash ISA only pays in the region of 1.7%^ while the UK Gilt 2-year yield is in the region of 0.32%^^.
This creates challenges, particularly in bond markets. In fact, only 14% of the global corporate bond market currently yields 4% or more, compared to a whopping 85% in 1997^^^.
So what alternatives are actually out there for investors? Investing in riskier bonds with higher yields is one way, and being selective is another.
Here are four bonds you may want to consider:
Fund manager Chris Bowie has run this fund since its launch in January 2015 and it has become one of the most dependable corporate bonds out there, with a yield of 3.88%*. Given the current yield of global bonds is low, Bowie acknowledges returns are also likely to be lower. However, he feels there are two mitigating factors which may lift the doom and gloom. The first of these is that anything can happen in a one-year timeframe, citing the strong performance seen in 2019, despite yields being sold off in the last quarter of the previous year. The second is the valuation opportunities created by Brexit, which he says, “will be slowly squeezed out of the market over the course of this year, leading to capital gains in sterling credit versus other markets.”
As the name suggests, Liontrust Monthly Income Bond aims to produce a monthly income with some capital growth. It does this by investing mainly in corporate bonds and some government bonds. The fund managers target bonds issued by high quality companies, which stand apart from their competitors. They start by analysing the economic backdrop, looking at aspects like interest rates and politics. They then examine the company itself and its ability to meet its debt obligations. They factor in the management team’s track record, business strategy, earnings performance plus the industry’s barriers to entry. On a company level, they assess key environmental, social and governance factors on a matrix scoring system before looking at valuations. The result is a concentrated portfolio of 50-100 holdings across a diverse range of companies. The fund currently yields 4.83*.
Another area of the bond market which had a good 2019 is the High Yield sector, with funds returning just shy of 11% over the year**. As monetary easing by numerous central banks across the globe deflected away from some of the notable deterioration in economic conditions. Of course, one of the biggest concerns in the high yield market is the risk of defaults (companies going bust), so careful selection is key. A fund we like in this space is the Baillie Gifford High Yield Bond fund managed by Robert Baltzer and Lucy Isles, which offers access to a portfolio of largely US, UK and European high yield bonds. The managers build a portfolio of 50-90 companies, looking for resilient businesses that can survive the full business cycle and have the ability to improve their financial health. The fund has a yield of 4.1%*.
Strategic bonds allow managers the opportunity to invest in different areas of the fixed income market, depending on their outlook, this flexibility is invaluable in markets – particularly when both uncertainty and volatility are rife. Investors may prefer the GAM Star Credit Opportunities fund, managed by Anthony Smouha and Gregoire Mivelaz. It typically has between 130 and 200 holdings. Around 70% of these holdings will be core, providing some income and capital preservation. The remaining 30% will provide high income and diversification. The fund currently yields 3.9%*.
^Source: MoneySavingsExpert website at 27 February 2020
^^Source: WorldGovernmentBonds.com at 28 February 2020
^^^Source: Schroders, 3 February 2020
*Source: FE Analytics, 28 February 2020
**Source: FE Analytics, total returns in sterling, 1 January 2019 to 31 December 2019
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.