How four corporate bond funds are leveraging inflows

UK investors have committed billions of pounds into corporate bond funds – but how are various portfolio managers using this influx of cash?

There is now £59.8 billion invested in the IA Sterling Corporate Bond sector after £2.9 billion of net retail inflows over the past year, according to the Investment Association*. Here we take a look at the different approaches being taken by four well-known fixed income investors from the Chelsea Selection and their outlook for the rest of 2024.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

Artemis Corporate Bond

The overall outlook for the sterling corporate bond market is positive, according to Stephen Snowden and Grace Le of the Artemis Corporate Bond fund. “Interest rates have already fallen in some jurisdictions and there would appear to be a strong possibility that the Bank of England cuts rates in September,” they wrote in a quarterly update.

This fund invests in investment grade corporate bonds, although it has some ability to allocate across the wider fixed income market. Its managers believe the recent composure exhibited by the UK bond market – when French government bonds were volatile – means gilts could be seen as safe haven assets.

They also suggested that now is a good time to be a bond investor, with the possibility of rate cuts by the Bank of England offering the potential for added spice. “Yields are currently high so we do not need to rely on interest rates falling to generate a healthy return,” they explained. “But when interest rates are eventually cut, the resulting capital gains should give bondholders a welcome boost.”

Rathbone Ethical Bond

This fund invests in quality investment grade bonds – but they must all have at least one positive environmental, social or corporate governance quality. There is also a banned list that excludes anything to do with mining, arms, gambling, pornography, animal testing, nuclear power, alcohol or tobacco.

According to the fund’s managers, Bryn Jones and Stuart Chilvers, government bonds have been a powerful counterweight to stock market volatility. “For now, we’re comfortable with our allocation to higher risk, higher income-paying investment grade corporate bonds,” they wrote in a recent update. However, they also class themselves as being “on alert” and ready to quickly position the portfolio more defensively if required over the coming months.

We like the fund’s stability, with Bryn having been at the helm of the portfolio for two decades. It’s also outperformed irrespective of its ethical constraints.

Royal London Corporate Bond

Shalin Shah and Matthew Franklin, the co-managers of this fund, aim to achieve a total return over three to five years by investing mainly in sterling-denominated corporate bonds. However, what sets this fund apart from rivals is its ability to find less well-known bonds with superior risk-adjusted returns. We also like the strength and stability of the team in place, as well as the fact this fund offers an attractive yield.

In a recent update, the managers noted that yields had remained sensitive to economic data and predicted a small fall in government yields during the third quarter. “Sterling investment grade yields are higher than they were at the start of the year, reflecting higher gilt yields, and are attractive both in absolute terms but also relative to government bonds,” they wrote. “Despite the contraction in credit spreads seen in 2024 they continue to compensate investors for the risk of default.”

TwentyFour Corporate Bond

The objective of this fund is simple: to achieve the highest possible income with the least amount of volatility. Although its focus on minimising risk means it will mostly have investment grade bonds, it can selectively hold high yield or floating rate bonds. Overall, we believe that TwentyFour Corporate Bond is one of the most dependable corporate bond funds that’s available to investors.

In their latest fund update, the team behind the portfolio suggested that a modestly lower than average interest rate duration profile was warranted. “However, the portfolio managers remain concerned that increasing unemployment rates across the US, the UK and especially Germany signal worsening GDP data to come,” they stated. “Recession risks both remain significant and are not fully priced into non-financial spreads.”

*Source: Investment Association, full figures, June 2024

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 fund managers and do not constitute financial advice.