Morgan Stanley Sterling Corporate Bond - a better year for corporate bonds

Jonathon Curtis | Fri 06 September 2019

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• The managers are less nervous about the global economy than many other investors
• The fund broadly matched its benchmark over the past 12 months
• It currently yields 3.2%, variable and not a reliable indication of future income

Our view

Ric Ford’s a highly experienced corporate bond fund manager who’s shown he can do better than his benchmark over the long term. Along with co-manager Dipen Patel, he runs the Morgan Stanley Sterling Corporate Bond fund by keeping things simple, thoroughly researching companies and making sure there’s plenty of diversification.

Ford and Patel aim to provide investors with a healthy income and some long-term growth. They usually invest fairly conservatively, but will be more adventurous if they think the potential rewards from higher yields make up for the extra risks. The fund currently yields 3.2%, although income is variable and that’s not a reliable indication of future income.

We like the managers’ flexible approach and, combined with the fund’s low ongoing charge of 0.22% (plus our platform fee of up to 0.45% per year) think it’s an excellent corporate bond fund option. That’s why you’ll find it on the Wealth 50 list of our favourite funds.

How do the managers invest?

Around half of the corporate bonds in the fund currently are from financial companies, like banks such as Lloyds and insurance companies like AXA. The managers think many bonds in the sector are attractively valued.

Most of the portfolio is invested in higher-quality ‘investment grade’ bonds, but the managers also invest in some higher-risk high-yield bonds plus some government bonds, which are normally lower risk and provide smaller yields. They have the flexibility to use derivatives, which add risk if they’re used, although currently they’re not.

Even though this is a Sterling corporate bond fund, there’s lots of international diversification on offer. While there are more bonds from the UK than any other country, more than half the fund is invested in bonds from countries like the US, Germany and France. A small number of bonds are from higher-risk emerging markets.

How’s the fund performed?

It’s been a much better 12 months for the fund and corporate bonds in general compared to a year ago. While the UK stock market barely posted a positive return, the fund’s 8.4% growth broadly matched the peer group’s 8.5% gain. This points to the potential diversification benefits of investing in corporate bonds, but isn’t a guide to the future.

The managers’ conservative investment approach means the fund’s normally held up better when markets have wobbled, but hasn’t quite kept up with rising markets. Over the long-term that’s resulted in the fund beating its benchmark. Over the last 10 years it’s grown 98.4%* compared with the IA Sterling Corporate Bond index’s 77% growth. That’s not an indication of future performance.

10 year performance of Morgan Stanley Sterling Corporate Bond

Past performance is not a guide to the future. Source: *Lipper IM to 31/08/2019

Past performance is not a guide to the future. Source: Lipper IM to 31/08/2019

Outlook

While some investors think a recession could be looming, Ford and Patel think we’re still a fair way from one. Part of that is because inflation, which normally rises towards the end of economic cycles, is still low. Technological disruption is keeping it down in their view.

The bond market may be hinting at trouble ahead, but Ford and Patel think close-to-zero yields means previous market indicators aren’t as useful anymore. They expect lower global growth but believe central banks will keep supporting economies through interest rate cuts.

Closer to home they’re wary of the potential impact of Brexit and a Labour government. But as increasingly international investors, Ford and Patel are more positive on the global outlook.

More about this Fund, including charges

Key Investor Information