With UK gilt rates at all-time lows, investors may be hesitant to purchase government bonds. Are you willing to take on greater risk in exchange for a higher return? If this is the case, corporate bonds may be worth examining.
Corporate bonds are essentially debt issued by businesses to support their activities. Investors purchase these IOUs and earn a return on their investment. Their risk is higher than that of government debt, but this should be offset by a higher yield. If you are new to the field, it may be difficult to choose individual firm bonds to invest in, thus we have chosen three active funds that invest in numerous bonds at once. If you wish to tap into this realm, here are several highly regarded Morningstar alternatives to consider:
Bronze Royal London Corporate Bonds
The £1.4 billion Royal London Corporate Bond, managed by fixed-income veteran Jonathan Platt since 1999, is a well-diversified fund with between 250 and 350 holdings to minimise ‘idiosyncratic issuer risk.’ This implies that Platt avoids putting all of his eggs in one basket since one of them may fail and be unable to fulfil its obligation.
Morningstar analyst Evangelia Gkeka rates the fund as Bronze. “Since inception, the strategy has beaten its Morningstar Category rivals in absolute and risk-adjusted terms, but it has somewhat underperformed its benchmark,” she writes.
The portfolio is divided into two parts: credit-agency-rated “high-profile” bonds (at least 80%) and under-researched “low-profile” bonds, which provide a greater return since they are more susceptible to mispricing. “These include off-benchmark exposures such as unrated, high-yield, and non-GBP bonds, which must have strong covenants and/or a securitized structure to be evaluated,” Gkeka notes.
The fund favours secured bonds from industries such as social housing, investment trusts, and structured securities. It offers a 12-month yield of 3.53% and a 10-year annualised return of more than 6%.
Silver BlackRock Corporate Bond
“Flexibility with a risk-adjusted focus makes this an appealing alternative for sterling corporate bond investors,” says Morning analyst Louise Babin of the BlackRock Corporate Bond fund, which has a Silver rating.
The fund, which has been managed by Ben Edwards since 2015, takes a flexible approach to invest. Indeed, its portfolio creation is not limited by its benchmark, the ICE BofAML Sterling Corporate & Collateralised Index, which has resulted in excellent outcomes from May 2012 to July 2019. Over the last five years, the fund has returned an annualised 5.5% and has a 12-month yield of 2.45%.
The portfolio has benefitted in particular from a diverse collection of holdings in financials, asset-backed securities, high-yield bonds, duration, and cross-market bets. According to Babin, “Edwards avoids raising risk solely for the sake of profits.”
“A quality manager and a well-implemented approach, underpinned by BlackRock’s well-established fixed income platform, make BlackRock Corporate Bond a great pick in the GBP corporate bond Morningstar Category,” she continues.
Silver PIMCO GIS Global Investment Grade Credit Fund (GBP Hedged)
The PIMCO GIS Global Investment Grade Credit Fund, which has more than £20 billion in assets, keeps Silver as a Morningstar analyst, as the team takes advantage of market turbulence to acquire certain emerging-markets corporate issuers. Morningstar analyst Samiya Jmili describes the move as “a decision that has so far paid off.”
According to Jamil, the fund’s performance may be attributed to “the expertise of its seasoned lead manager (Mark Kiesel), the assistance of an exceptional group of corporate bond managers, and a varied approach that draws on the firm’s extensive macroeconomic and fundamental research.”
Kiesel has led the fund for more than 16 years, drawing on the firm’s vast resources for inspiration, such as the macroeconomic analysis conducted in PIMCO’s forums and regional committees. The fund has a five-year annualised return of 3.8% and a twelve-month yield of 2.25%.
Last but not least, Kiesel has tried to minimise the portfolio’s credit sensitivity, bringing it approximately in line with the market’s, in keeping with the firm’s conservative posture toward corporate credit risk. However, the portfolio has retained its long-standing overweights in banks, pipelines, and casinos while downplaying areas prone to change, such as retailers and utilities.
Frequently Asked Questions
What exactly is a corporate bond?
Bonds are issued by a firm to raise cash. They borrow money from investors in the form of bonds, which is a type of debt. When you buy a bond, the issuer is legally obligated to pay you monthly interest as well as the face value of the bond when it matures.
Can you provide me with the names of corporations that have issued bonds?
Bonds are issued by a wide range of enterprises, from well-known firms like BHP, Qantas, and Commonwealth Bank to tiny firms like G8 Education and Praecox.
FIIG’s DirectBonds Service offers over 400 bonds. Foreign currency-denominated bonds, such as USD, GBP, and Euro bonds, are also available to wholesale qualifying investors.
How do corporate bonds function?
When you buy a bond, the issuer is legally obligated to pay you regular interest (referred to as coupons) and the face value of the bond (the amount the bond was issued at – generally $100) must be given back to you at maturity.
Will I get refunded my money?
A bond issuer is legally obligated to repay the face value of the bond at maturity. When the bond matures, you will be paid the face amount if the bond issuer remains solvent.
Default rates for bonds with an investment grade credit rating are somewhat more than 1% over a five-year duration till maturity.
Are there several forms of bonds?
Yes, there are several forms of bonds. The following are the most typical forms of bonds:
Fixed-rate bonds pay the same amount of interest for the life of the bond, which is determined at the time of issue.
Fixed-rate bonds are inversely related to interest rates; when interest rates rise, the price of a fixed-rate bond falls. The opposite is also true: as interest rates fall, the price of these bonds rises. This is because the only method for these fixed-rate bonds to reflect market changes is through price swings.
It is vital to understand that the price of a bond may change, but this has no bearing on the bond’s interest/coupon rate.
Fixed-rate bonds help you to plan since the coupon rate remains constant during the bond’s life.
The floating rate bonds pay a fluctuating coupon based on a variable benchmark, such as the bank bill swap rate (BBSW). The BBSW is just the cash rate in the bond market.
Because the BBSW might change, the margin over the benchmark is set at the time of issue. The BBSW represents the market’s perception of interest rates; for example, if the market expects interest rates to rise, the BBSW will climb as well.
Floating rate notes carry less interest rate risk since the coupons rise and decrease in line with market interest rate forecasts.
Bonds linked by inflation Bonds that are tied to the Consumer Price Index or inflation are known as inflation-linked bonds. The Capital Index Bond (CIB), which has a set coupon, is the most prevalent form of inflation-linked bond.
CIBs typically offer modest coupon rates, but the principle is tied to the headline inflation rate, which means that the principal grows with inflation every quarter, and the coupon is computed on the increased principal amount.