Royal London Corporate Bond - doing something different

Richard Troue | Tue 12 December 2017

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• The team continues to exploit inefficiencies in under-researched areas
• Shalin Shah joined Jonathan Platt as co-manager in October 2017
• We continue to rate the team highly and the fund remains on the Wealth 150+

Our View

The depth and breadth of Royal London’s research sets them apart, in our view. Jonathan Platt and his team consider bond markets to be inefficient. Their relentless pursuit of the opportunities this can create has helped to deliver good long-term returns, although there are no guarantees this will continue.

Shalin Shah was appointed to co-manage the fund alongside Jonathan Platt in October 2017, having been a member of the team since 2008. We met him recently, along with Jonathan Platt, and believe the duo has the potential to work well together. In this case we believe the addition of extra resources to the fund is positive for investors.

At a time when bond yields are low by historical standards we think the willingness to go the extra mile and uncover opportunities off the radar of other investors could prove fruitful. At times this can involve taking a little more risk in an effort to deliver better long-term returns. Providing you are comfortable with this we continue to believe the fund is an excellent choice for exposure to corporate bonds. It remains on the Wealth 150+ list of our favourite funds.

Research in action

There is no secret formula to Jonathan Platt’s approach. He is simply willing to dig a little deeper than some investors and take a flexible approach.

Lots of bonds are assigned a credit rating, for example, which is designed as a measure of how risky they are. No rating system is perfect though, and by conducting their own more in-depth analysis the team can exploit this.

They don’t believe bonds issued by Co-operative Bank, for example, are as risky as the relatively low rating on them implies. Some investors would look at this bond in the same light as those with the same rating and assume the yield wasn’t attractive. Jonathan Platt compares it against bonds with a higher credit rating, which he believes more accurately reflects the risk involved, and concludes the yield is attractive for the level of risk being taken.

Similarly, some bond issuers don't pay for a credit rating at all, so lots of investors ignore them. The Royal London team was happy to invest in unrated bonds issued by British Land though, after conducting their own analysis. They were able to get a more attractive yield than for similar rated bonds without there being a significant difference in risk.

Performance update

Performance has been strong over the past year and the fund has grown by 7.5% compared with 5.3% for the average fund in the IA £ Corporate Bond Sector*. Investments in bonds issued by financial companies, particularly in the insurance sector, have been beneficial. Please remember past performance is not a guide to the future.

Secured and asset-backed bonds have also been a successful hunting ground and the team remains positive on this area. Just under half the fund is invested in secured bonds, including those issued by property and social housing companies (where the bonds are secured against the properties). This means the portfolio looks quite different to the benchmark index and other funds in the sector, but it’s another example of how the team aims to add value by doing something different. They also have the flexibility to invest in higher-risk high-yield bonds, which currently account for just under 10% of the fund.

The way the fund is invested means it will perform differently to competitors and the benchmark at times, but we believe the team has the potential to add value for patient, long-term investors. It currently yields 3.5%, although this is not an indication of future income.

Past performance is not a guide to the future. Source: Lipper IM *to 31/11/2017

Please note the fund takes charges from capital which can increase the yield, but reduces the potential for capital growth.

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.