Morgan Stanley Sterling Corporate Bond - a conservative bond portfolio

Kate Marshall | Fri 04 March 2016

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We view the Morgan Stanley Sterling Corporate Bond Fund as a conservative, core option for exposure to investment grade corporate bonds. The management team place emphasis on offering some shelter during difficult market conditions, although they will use their flexibility and act more aggressively when they feel they are being paid to take on additional risk.

The fund has the backing of a well-resourced and highly-experienced fixed interest team at Morgan Stanley. The small and nimble size of the fund also provides the team with greater flexibility to take advantage of new opportunities when they arise compared with some other funds in the sector.

Our analysis suggests the historic yield paid over the past 12 months is 2.3%. Presently, the fund's quoted yield is 3.3%, which is an estimate of the income expected to be paid over the next 12 months. However, it is important to remember this yield is variable and not guaranteed to be achieved.

This fund has one of the lowest ongoing charges in its sector of 0.22%, which is exclusively available to Hargreaves Lansdown clients (the standard ongoing fund charge is 0.37%). The Hargreaves Lansdown annual Vantage Charge of 0.45% also applies.

Performance review

This fund was added to the Wealth 150 in November 2013. Over this time, the fund has delivered a total return, with income reinvested, of 9.0%, compared with 7.8%* for the average fund in the sector. We also remain encouraged by the team's longer-term performance, although past performance should not be seen as a guide to future returns.

Source: *Lipper IM to 01/03/2016. Past performance is not a guide to future returns.

The majority of the portfolio is held in higher-quality investment grade corporate bonds, although the managers will invest selectively in high yield bonds when they feel they will be rewarded for the risk taken. Last year, the fund’s performance was supported by its allocation to higher-risk high yield bonds. In particular, exposure to financials bonds benefited performance, as supportive policy from central banks, such as low interest rates, has allowed companies to service their debts more easily and helped keep default rates low.

The fund also benefited from individual bond selection in the industrials sector, particularly by avoiding companies viewed as likely participants in merger and acquisition (M&A) activity. M&A activity is often bad news for bondholders, especially when a lower-quality candidate takes over a higher-quality business, as it typically leads to rising debt to finance the acquisition. This could also ultimately lead to a downgrade in a company's credit rating.

Portfolio strategy

The managers continue to favour bonds sitting at the lower end of the investment grade bond spectrum, favouring A- and BBB-rated bonds for example, which generally carry higher levels of credit risk. Credit risk refers to the possibility that the issuing company will default and be unable to pay back investors' via their interest payments. However, they believe accommodative policy from central banks, such as keeping interest rates low and supporting economic growth, will continue to keep default rates low.

The managers have reemphasised to us the fund's low duration position. Duration is a measure of the fund's sensitivity to rising yields or interest rates. When interest rates or bond yields rise (and prices fall), this low duration stance should provide an element of protection to the portfolio, although the fund could still fall in value in this environment.

Please note the fund has the flexibility to use derivatives, which can increase risk.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.