Royal London Sterling Extra Yield Bond - a unique approach to bond investing

Kate Marshall | Wed 05 April 2017

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• This flexible bond fund offers a unique approach to fixed-interest investing
• A focus on overlooked areas of the market produces a higher income, but makes the fund a higher-risk proposition
• The fund benefits from the talents of Eric Holt and one of the most experienced bond teams in the UK

Our view

The Royal London Sterling Extra Yield Bond Fund offers a different perspective on bond markets. Manager Eric Holt and his team focus on more esoteric, undervalued and overlooked areas. This includes bonds without a credit rating, or those with a claim on assets, such as property or cash flows. The income on offer can be attractive, although yields are often higher to help offset the additional risk of default.

A combination of investments in niche areas and more traditional areas of the government, corporate, and higher-risk high-yield bond markets has worked well for the team over the long term. With a yield of 6.6% they have also demonstrated it is possible to deliver an attractive income from bonds. Yields are not a reliable indicator of future income and past performance is not a guide to the future.

This fund is on the adventurous side of bond investing and performance could be volatile during more turbulent times for bond markets. Over the long term we expect the team to deliver good returns, predominantly in the form of income. The fund currently features on the Wealth 150+ list of our favourite funds with the lowest ongoing fund charges. The Vantage platform fee of up to 0.45% a year also applies.

Performance review

The fund has performed well since its launch in April 2003, although it has not always been a smooth ride. Performance was hit hard during the 2008 financial crisis. The bond prices of less financially secure companies, which Eric Holt often targets, fell heavily.

Longer-term performance has been impressive and has primarily been driven by generating a high income. Since launch a £10,000 investment has generated over £9,500 in income, in addition to some capital gain. For those who reinvested the income their £10,000 investment would now be worth more than £28,500. This highlights the importance of income as a component of returns and the need to take a long-term view.

Past performance is not a guide to the future. Source: Lipper IM, correct at 31/03/2017

Recent performance has also been encouraging. Over the past five years the fund has delivered a total return (with income reinvested) of 66.2%* compared with 28.0% for the IA £ Strategic Bond sector, although this is not a guide to how the fund will perform in future.

Past performance is not a guide to the future. Source: Lipper IM *to 31/03/2017

Market and portfolio review

Against a backdrop of low interest rates and political and economic uncertainty, fixed interest investments maintained their appeal in 2016 and into the New Year. Quantitative easing programmes across developed markets have also helped to keep bond prices buoyant.

Sterling’s weakness against most major overseas currencies boosted the returns from overseas investments for UK-based investors over the past year. The fund has made use of its flexibility to invest in bonds denominated in currencies other than sterling, and this provided a tailwind to performance.

Bonds issued by energy companies also staged a recovery in an environment of rising commodity prices. Eric Holt took the opportunity to take profits from some stronger-performing investments and recently sold bonds issued by mining company Glencore and energy firm Santos Energy.

An investment in Progress Healthcare, a private finance initiative to help fund the upgrade of Peterborough Hospital, has also performed well and exemplifies the manager’s investment process. The bond’s credit rating was previously downgraded when two of its interest payments went unpaid. Its price suffered as a result, but Eric Holt viewed this as a temporary setback and took the opportunity to invest at a more attractive yield. His views have since been vindicated as the bond recommenced its income payments and has also delivered an attractive capital gain.

Please note as an offshore fund you are not normally entitled to compensation through the UK Financial Services Compensation Scheme.

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.