Royal London Sterling Extra Yield Bond: June 2021 update

Joseph Hill | Wed 09 June 2021

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• Co-manager Eric Holt is a seasoned bond investor with over three decades of investment experience
• The fund invests across the bond market, including in higher-risk unrated bonds
• The fund has performed well since its launch in 2003, outperforming its IA Strategic Bond peer group
• The fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The fund offers the potential to deliver a high income for investors, but its approach means it’s also higher risk. The fund could be used to diversify a bond portfolio, or a more adventurous shares portfolio seeking exposure to other asset classes. We think the fund could be more volatile than some other bond funds.

Manager

The fund is co-managed by the experienced Eric Holt and Rachid Semaoune. Holt’s investment career stretches over three decades and he’s been manager of the fund since its launch in 2003. Semaoune joined Royal London in 2015 from UBS Asset Management.

Eric Holt and Rachid Semaoune also have the help of a team of analysts and other fund managers at Royal London. Both managers also run other fixed income strategies at Royal London.

Process

The managers look for opportunities across the credit market by investing in a combination of investment grade, sub-investment grade and unrated bonds (bonds without a credit rating) where they believe valuations are attractive. They don't rely on credit ratings and consider if the reward on offer is sufficient for the risk of owning a bond. They tend to focus more on the prospects for individual bonds, rather than taking wider views on things like duration (a bond's sensitivity to a change in interest rates). Holt and Semaoune therefore aim to add value for investors by investing in bonds others don't fully understand that they think could go on to perform well in the future. They hold a wide range of bonds in the fund so returns don't rely on the performance of a single investment.

Despite seeing a rise in bond yields this year, the managers believe interest rates are set to remain at very low levels over the next two to three years with central banks continuing their active approach. And while they believe the economic impact of the virus will continue to have a detrimental impact on corporate profitability there are sufficient rewards on offer in the market to compensate investors.

The managers have been active in identifying new opportunities to add to the portfolio. Recent purchases include the bonds of electricity generation business Intergen, utility Thames Water and secured a finance business, DDM. They also sold US denominated bonds held in German insurer Allianz at a profit.

Culture

We believe Royal London’s speciality is in managing fixed income portfolios. Their philosophy is that all well-diversified portfolios should include an element of income. They use a combination of top-down macroeconomic analysis and bottom-up security selection to manage their bond portfolios which has served them well over time. The managers also consider environmental, social and governance (ESG) factors in their analysis. This helps them identify potential risks that could affect the long-term viability of lending, increase costs to the business or result in future litigation.

The managers are rewarded based on the long term performance of their fund so their interests are aligned with investors. We think their incentivisation structure is better than most and encourages good behaviour but it isn’t as long term as some other groups.

Cost

This fund has an ongoing annual charge of 0.84%, but we've secured HL clients an ongoing saving of 0.44%. This means you pay a net ongoing charge of 0.40%. The HL platform fee of up to 0.45% per year also applies.

Performance

Eric Holt has delivered good returns to investors over the long term. Since the fund launched in September 2003 it’s delivered returns of 237.7%*, compared with 151.9% for the IA £ Strategic Bond peer group average. The fund has also performed well over the last year, as markets recovered from the initial shock of coronavirus, outperforming its peer group. More recently bonds held in the financials, energy and commodities sectors have aided performance.

The fund can be more volatile than other bond funds though, which we saw during the 2008 financial crisis and at the start of 2020 amid the coronavirus pandemic. This means we don't think the fund is likely to offer shelter in an economic or bond market downturn.

Investments in some areas of the market that other investors tend to overlook, like unrated and higher yielding bonds have helped deliver strong returns for investors in the fund. But these investments are less liquid, meaning they can be more difficult to trade in large volumes. The fund has increased in size in recent years which could mean it is less able to take advantage of these opportunities in the future.

Past performance is not a guide to the future. Source: *Lipper IM to 31/05/2021.

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

Find out more about Royal London Sterling Extra Yield Bond, including charges

Royal London Sterling Extra Yield Bond Key investor information