Royal London Sterling Extra Yield Bond - a high yield in a low-yield world

Richard Troue | Thu 14 June 2018

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• Eric Holt expects one 0.25% increase to the Bank of England’s base rate in 2018
• He thinks corporate bonds offer an attractive income and remain popular because interest rate are so low
• The fund performed better than many of its peers over the past year

Our View

This fund is an excellent choice for a high income from corporate bonds. It’s a more adventurous option because high yields are typically offered by less financially secure companies. They pay a higher income to compensate for the additional risk.

We like the fact Eric Holt and his team invest in a wide range of bonds in different sectors and from different companies. It means the fund doesn't depend on a single area. They also look in areas ignored by many other bond fund managers. This makes the fund different from its competitors.

It currently yields 5.9%, which is variable and not an indication of future income. We don't think the fund will offer shelter in an economic or bond market downturn. We do believe Eric Holt and his team are capable of excellent long-term performance though. For this reason the fund deserves its place on our Wealth 150+.

Performance and income

The fund’s performance has been strong over the past year. It’s grown by 7.2%, compared with 0.2% for the average fund in its sector. Please remember past performance is not a guide to the future.

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2018.

*Full 5-year performance figures are not available for this share class.

We’re also impressed with the manager’s long-term performance. He’s delivered a much greater return than his peers since the fund launched in September 2003. The chart below shows the higher-risk nature of the fund though – it fell significantly during the last financial crisis.

Royal London Sterling Extra Yield Bond - performance since launch

Past performance is not a guide to the future. Source: Lipper IM to 31/05/2018.

This is predominantly an income fund, and most of its performance has come from income payments. A £10,000 investment at launch has made over £9,000 of income and the initial investment would have grown to £10,885. Reinvesting the income would have turned £10,000 into more than £27,000. Please remember the value of any investment, and the income from it, will fall as well as rise.

Current Investments

Eric Holt aims to invest in bonds that pay an attractive income, but aren't as risky as they first appear. To do this he takes a different view and looks in areas overlooked by most investors.

He often invests in bonds backed by the assets a company owns, such as property. These can be sold if the company can’t repay its bonds.

He bought Tesco Property bonds, for example, when the outlook for the supermarket was negative. For this reason the bonds offered a good yield. It’s since performed better, so the bonds have gone up in price and have paid a high income.

Some investments in the energy sector were also made when the oil price was lower and investors were negative. This paid off recently as the oil price has risen.

Overall, the portfolio is focused on higher-risk high-yield bonds. That's why it offers a high yield, but the additional risk means it can be more volatile than a fund focused on higher-quality bonds. This is also an offshore fund. This means investors are not normally entitled to compensation through the Financial Services Compensation Scheme.

Please read the Key Features/ Key Investor Information in addition to the information above.

Find out more about this fund including charges