Bond funds: Premier League Nov 15 update

Sterling corporate bond sector

Rathbone Ethical Bond

Rathbone Ethical Bond, one of our sister publication Money Observer's Rated Funds,  is a new entry for this review, but it regularly features in the league.

This is thanks to the consistently strong performance delivered by Bryn Jones, who has been managing the fund since 2004 and who over the past three years has outperformed every other manager in the sterling corporate bond sector, with a total return of 24.2%.

Jones says a combination of "good themes, credit work and valuations" has driven the portfolio over the period.

Thematically, avoiding companies exposed to emerging markets has helped, as has investing in longer-duration bonds when most credit managers were avoiding them due to fears over interest rate rises.

This strategy paid handsomely when the European Central Bank announced its quantitative easing programme in 2014.

The fund team works hard to assess the credit profile of an investment: "If we get a sniff of a potential downside risk, we won't touch it or we'll sell it. That kind of work is difficult to quantify, but it makes a big difference," he says.

Jones has developed a strategy called "break-even duration", based on a calculation derived by dividing a credit spread by its duration to determine its value compared with gilts, that has proved "amazing". He also credits the fund's ethical bias for its success.

Sterling strategic bond sector

Royal London Sterling Extra Yield Bond

Another Money Observer Rated Fund, Royal London Extra Yield is unquestionably one of the best-performing bond funds in the sterling strategic bond sector.

Over three years to 31 August it delivered the third-best total return in the 75-fund sector. Over five years it is the best performer, returning 62% compared with 26.5% from the sector.

Eric Holt, who has run the fund since its launch in 2003, says this strong performance is largely due to the fund's "supportive" 6.8% annual yield.

On a sector basis, Holt says his holdings in financial firms, which account for nearly 30% of the portfolio, have proved a significant boon for the fund. This includes his investments in UK banks such as Lloyds, which Holt has held for more than a year and which he is quick to defend.

"What has happened in the banking sector has been quite radical. Pre-credit crunch, the business model was very low capital and very highly geared balance sheets.

"We've now moved into an environment where, from a bondholder perspective, the increase in regulation has been very much to our benefit. Valuations have also normalised as the pricing of assets in the sector has come up from extraordinarily low levels," he says.

Global bond sector

Schroder ISF Global High Yield

The Schroder ISF Global High Yield fund, launched in 2004, delivered first-quartile returns over one, three, five and 10 years to 30 August. This is largely due to outstanding performance since 2011: US-based manager Wesley Sparks delivered 37% in the four years to 31 August.

For our league, the fund's three-year performance is what counts, but with a return more than five times that delivered by the average global bond fund over the period, it doesn't disappoint.

Sparks says this outperformance is mainly due to "superior security selection" or "picking the right companies and the right bonds", and the focus on risk management.

"We focus on limiting downside risk in volatile markets such as those seen in the third quarter of this year, and several strategies - including reducing our exposure to lower-rated, high-yield bonds and layering in portfolio hedges - have proved beneficial," he says.

Sparks favours US and UK high-yield markets for returns next year, and is cautious about emerging markets.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.