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UK Equity and Bond funds a mixed bag

Is there a good choice in this oddball sector?

Christopher J. Traulsen, CFA 24 March, 2009 | 7:59AM
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We're not particularly big fans of the IMA's Equity & Bond Income sector. It's defined as funds with at least 20% to 80% in UK equities, at least 20% to 80% in UK bonds, and that aim to yield at least 120% of the FTSE All Share index. Funds must also invest at least 80% of their assets in the UK. The main problem is that it overlaps substantially with the managed sectors, giving funds the ability to pick and choose which peer group they want to be in. The definition is also broad, giving investors in the fund little indication of how they should expect offerings to be positioned.

That breadth was on display in an exceedingly difficult past 12 months, with returns in the sector ranging from Jupiter Monthly

Income's 39.9% loss at the low end to CF Charles Stanley Regular High Income's 0.34% loss at the high end. The latter was en extreme outlier due in part to its exceptionally low equity exposure, but other funds near the top of the table still registered losses of around 13%, making the range of performance large. The failure of many funds to follow suit and move more sharply out of equities is of interest given the sector's lack of real constraints in that regard--indeed, the point of having such a broad mandate rather escapes us if you don't use it during one of the century's worst markets for equity performance.

Jupiter Monthly Income's performance is not of particular surprise. The fund invests across a range of investment trusts and bonds, including exposure to some highly geared split-cap offerings that amplify the fund's volatility. Its use of investment trusts allows the fund to get non-UK exposure whilst still technically remaining invested in the UK. For example, the fund holds a number of UK-listed trusts focused on Asia, as well as several focused on global commodities and financials. In addition to the gearing, the commodities and financials exposures are likely to have dented the fund's returns in 2008.

Even aside from last year's performance, this strikes us as a difficult offering to like. It delivers a strong yield (at the moment, this owes in part to the collapse in price of many of its holdings) but a strong yield is meaningless if your capital is being eroded. Instead, investors and advisers need to look at total return, and this fund has fared poorly in that regard. Its risks would also suggest that it is inappropriate for investors seeking a reliable income stream without significant impairment of capital.

At the other end of the spectrum Rob Hepworth has proven himself able to add significant value through time at Ecclesiastical Higher Income. Hepworth, who has been at the fund since launch in 1994, has smartly kept the fund out of troubles spots such as financials and mining and devoted the bulk of assets to bonds and cash, helping limit losses here to 13.4% over the past year. The fund does tend to lag in the most ebullient markets, so investors who want to keep pace in all environments won't find this to their liking. However, for those looking for a more cautious long-term holding, the fund has proven itself a strong choice.

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

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.