Royal London Corporate Bond research update

Heather Ferguson | Tue 23 December 2014

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In order to outperform a benchmark index or peer group, fund managers often need to position their fund away from the mainstream. By viewing the sector from another perspective and standing apart from the crowd, they can gain an edge over other investors.

Sajiv Vaid and Jonathan Platt, co-managers of the Royal London Corporate Bond Fund, are willing to look off the beaten track. Rather than focus solely on bonds which have received a credit rating from an agency such as Moody’s, they also invest in unrated bonds. Many companies choose to be unrated as rating agencies charge a fee to classify a bond.

Most investors ignore these bonds, perceiving them to be higher risk. However, the Royal London team conduct their own analysis to uncover bonds which they believe to be high quality, offering attractive yields, but which they believe are not necessarily higher risk. The fund currently holds around 10% of the portfolio in unrated bonds.

This willingness to look for opportunities in areas others fear to tread has contributed to strong performance over the past five years, although there are no guarantees this will continue. Over the past five years, an initial investment of £10,000 in this fund would have produced an income of £2,495.59, compared with £910.49* for the average fund in the sector. In addition, since the fund’s launch, it has outperformed the IMA £ Corporate Bond sector by 17.5%. Please remember, past performance is not a guide to future returns.

Past performance is not a guide to future returns.

Annual percentage growth
Dec 09 -
Dec 10
Dec 10 -
Dec 11
Dec 11 -
Dec 12
Dec 12 -
Dec 13
Dec 13 -
Dec 14
Royal London Corporate Bond 9.8% 3.5% 17.0% 3.1% 10.1%
IMA £ Corporate Bond 5.6% 1.4% 14.6% 1.4% 8.3%

Past performance is not a guide to future returns. Source: Lipper IM* to 01/12/2014

Looking ahead, the managers continue to believe corporate bonds look attractive. Interest rates do not look likely to rise in the short term and inflation looks set to remain low. This is positive for the corporate bond sector; the income they offer looks reasonable when compared with other assets and low inflation reduces the risk of capital erosion.

However, corporate bonds have performed exceptionally well over the past five years which has led yields to fall. The income on offer, over-and-above that offered on government bonds, has fallen to historically low levels. This means investors are no longer demanding significantly higher returns for the additional risk of lending to companies over the UK government.

The managers are therefore maintaining a diversified portfolio and are holding bonds secured against company assets. In the case of the latter the assets the debt is secured against can be sold if the company gets into trouble and cannot repay its debt. This could recover some losses for bond holders in the event of a default. The managers currently hold asset-backed bonds issued by Tesco, which are secured against property the company owns. They are confident this level of security means these bonds will perform better than Tesco’s unsecured debt.

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Our view on this fund

This fund provides access to an experienced team which we hold in high regard and the managers have successfully identified undervalued areas of the market which have gone on to perform strongly. The fund currently yields 3.9% (variable and not guaranteed) compared with a yield of 3.45% for the benchmark and remains on our Wealth 150 list of our favourite funds across the major sectors.

Please note the fund's charges can be taken from capital, which can increase the yield but reduce 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.

The value of investments can go down as well as up, this means you could get back less than you invested. Therefore all investments should be regarded with a long term view. No news or research item is a personal recommendation to deal. If you are unsure about the suitability of an investment please contact us for advice.

Important information

Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice.

No news or research item is a personal recommendation to deal.

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