3 Bond Funds for Plain Vanilla Income

Every portfolio needs some simple income components. We round up some options for bond investors looking for reliable income

Holly Black 11 November, 2019 | 1:47PM
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The most exciting investments to talk about are often those investing in innovative areas or delivering double-digit growth, but every portfolio also needs some holdings offering something a little more predictable.

Bond funds investing in plain vanilla areas such as high-quality corporate debt and government gilts can provide a helpful ballast to some of the racier areas of investment, as well as delivering a reliable income stream. We round up some of the options:

Allianz Gilt Yield

The Bronze-Rated Allianz Gilt Yield fund focuses on capital preservation. It invests in a portfolio of UK government gilts, which may not sound very diversified, but manager Mike Riddell uses a mix of different durations and coupons to provide protection.

Gilts are among the safest debt investments you can choose, because the chances of the UK government defaulting on its debt is incredibly low. But that safety has seen the income on offer from these investments plunge in recent years. In the summer the yield curve on UK Gilts even inverted, meaning investors were getting a better return on shorter-term two-year gilts than on longer-term 10-year debt.

Morningstar analyst Louise Babin rates the flexibility of the fund and says Riddell has proved his ability to add value since taking over the running of the fund in 2015. However, his active approach to investing can lead to “lumpy” performance, which is why its rating is held at Bronze. Ridell also has the flexibility to invest up to 20% of the fund’s assets in areas outside of Gilts, and holdings in US and Canadian debt has helped boost performance in recent years.

The fund’s returns highlight how bond investing can deliver capital growth as well as income. Indeed, Gilts have delivered strong returns this year as an increase in volatility has created a surge of demand for safe-haven assets. The fund yields 1.27% and has delivered annualised returns of 5.2% over five years.

Invesco Corporate Bond UK 

An experienced and stable team with a tried-and-tested approach has earned the Invesco Corporate Bond UK fund a coveted Gold Morningstar Analyst Rating.

The fund invests in investment grade company debt, with around 26% of the portfolio invested in corporate debt rated A or above. The majority of assets (59%), however, is held in BBB rated bonds. Liquidity is a key consideration so there are a number of big name issuers in the portfolio including Lloyds Bank, Vodafone Group, Electricite de France and US telecoms firm AT&T.

The fund takes a flexible approach and has no formal constraints on the sectors and regions in which it can invest. Up to 20% of assets can be in high yield bond, further down the credit quality spectrum than the investment grade assets on which it primarily focuses. Morningstar analyst Evangelia Gkeka says the team’s pragmatic approach and focus on the macroeconomic outlook means that the fund’s performance can deviate significantly from its peers. The fund yields 3% and has delivered annualised returns of 3.8% over five years.BN

BNY Mellon Newton International Bond 

The Bronze-Rated BNY Mellon Newton International Bond fund has a thematic approach to its investment strategy and is described by Morningstar’s Babin as being “fairly reined-in” compared to other funds in the Morningstar Global Bond fund category.

Paul Brain, Newton’s head of fixed income, has been at the helm since 2008, giving the experienced team god consistency. He is supported by two deputies and a team of analysts. The fund focuses on government bonds across the globe and aims to beat the JPM Global Government Bond Index, an index of bonds issued by 13 governments.

Babin says the fund has struggled to achieve its performance target since the financial crisis and that it may struggle to outperform its peers as other funds in the Global Bond category tend to investors in corporate bonds not just government bonds, which can leave this fund at a disadvantage, especially in the ultra-low interest environment of recent years. She adds: “But compared with a more relevant yardstick – its benchmark, the JPM Global Government Bond Index – the fund’s track record is solid.”

The fund, which has a low ongoing charge of 0.57%, yields 1.58% and has delivered annualised returns of 6.35% over five years.

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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About Author

Holly Black  is Senior Editor, Morningstar.co.uk