Finding your place in the worldwide yield slide

Victoria Hasler, head of research at Square Mile Investment Consulting and Research, urges investors to pay less attention to yields and remember why they bought bonds in the first place.

Finding your place in the worldwide yield slide

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Clearly, bonds can decline in value, particularly over the shorter term, but over the long term the performance from buying and holding a bond to maturity is predictable because both the cashflows and the final redemption value are known in advance.

In a fund there is no final redemption value, so this predictability is somewhat diluted. However, given these characteristics of bonds, it is still possible to find managers who have a strong focus on preserving capital for investors.

We like the JP Morgan Strategic Bond Fund, run by the highly experienced Nick Gartside.

The investment process is both thorough and well applied, with a strong focus on risk at both the individual security and portfolio level, and should result in a diversified portfolio with varied sources of returns.

Correlation to any one part of the market should be low and maximum drawdowns should be limited. Historically, this has indeed been the case, and other than some minor volatility the returns profile of the fund has been remarkably smooth.

Focus on distribution

Last, but by no means least, many investors hold bonds for income.

Here I would suggest a focus on yields is perhaps not the most helpful for investors.

It is equally as important, if not more so, to look at the actual level of distributions a fund pays, as this is what investors will actually receive.

I know of few end investors who truly care what the yield of a fund is, but many who know to the penny what actual distributions they receive. Often this is because such distributions are then used directly to pay school fees or nursing home fees, for example.

An example of such a fund could be Schroder Strategic Credit.

Peter Harvey, who has managed the fund since its launch in 2006 under the Cazenove banner, has proved himself adept at maintaining value over longer time periods and, in addition, has created an impressive dividend profile on the fund.

While the yield varies depending on market conditions, the absolute value of dividends on the fund has been remarkably consistent for most of its life.

This is an attractive feature and makes the product a compelling option for investors looking for a steady income stream in a corporate bond fund with limited interest rate risk.

The level of the dividend is by no means guaranteed but Harvey is acutely aware of what type of person makes up his investor base and of how they use the fund – and manages it accordingly. This focus on the investor experience is refreshing.

While the long-term trend of declining yields cannot continue forever, fixed income investments, in one guise or another, still have a place in a diversified portfolio for most investors.

Precisely what that place is each investor must determine for him or herself.

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