Only two pure corporate bond funds have been awarded the highest rating in Standard & Poor’s latest review of fixed-income performances – both invest only in sterling bonds and almost entirely in high grade.
The S&P report – ‘High-income sector overview’ – released in late August looks at several aspects of each fund to provide a rating: the fund’s management, the stability of the management, its investment strategy and the fund’s performance. There are three ratings – A, AA and AAA – and it is only the top 20% of funds in terms of performance that qualify for a rating.
Although seven funds secured AAA ratings, there were only two pure corporate bond funds – Aberdeen’s £200 million Sterling Bond Unit Trust and Threadneedle’s £249 million UK Corporate Bond Fund – in the top bracket. The rest were either government bond funds, emerging market funds or a blend.
Phil Roantree, manager of Aberdeen’s fund since 1994, says: “Enhancing yields by investing in corporate bonds has proved over the long term to be a successful way to outperform gilts. There will of course be periods when corporate bonds underperform but over the long term the yield pick-up tends to be sufficient to enable outperformance. Of course, sub-investment grade bonds provide an even bigger yield pick-up but this comes at a price – higher risk.” The fund has returned 67.8% over the past five years, compared with 47.7% for the index.
Threadneedle’s fund has been managed by Ted Bacon since its inception in July 1995 and, according to Bacon, “even in this incredibly choppy market we’ve been able to hold our own”, performing above average in each of the past five years.
“The lack of euro corporate bond funds qualifying for a rating is because there are not enough funds in the sector to provide a meaningful comparison,” says Omar Gadsby, a fund analyst at S&P.