Which Bond Funds Offer Defence from Market Shocks?

Many flexible bond funds have failed to deliver on their promises, proving highly correlated with equity markets when the shocks hit

Irene Ruiz Espejo 27 February, 2018 | 12:03PM
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Irene Ruiz Espejo: Over the last few years, investors have felt that the 35-year bull market for bonds is nearing its end. This has seen attention drawn to non-traditional bond funds, where launches have mushroomed. Many of these funds look to shield bond fund investors from interest rate rises; while at the same time, providing returns at least in line with core bond funds.

Here at Morningstar, we did a deep dive to identify if these funds have delivered on their promises. Our findings show that over the past five years, these funds have generally run low interest rate risk combined with other types of risk, such as credit risk. Exposure has shifted towards high-yield bonds, emerging-markets debt, or structured credit. In doing so, many funds have high correlations with riskier parts of the bond market, and by association equity markets. The consequence is that investors can be left with little portfolio defence if a market shock takes place.

So far, the overall category has struggled to deliver on its ambitious set of promises, and we believe a sceptical eye is needed when deciding whether to use a global flexible bond fund as part of your portfolio. That said, there are funds in this space that we rate highly such as Janus Henderson Strategic Bond and BlackRock Fixed Income Global Opportunities.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Irene Ruiz Espejo  is a Morningstar Fund Analyst