Fund manager update

  • Fund manager update
  • 7 minute read

By Andrew Metcalf


The Bond Income fund returned 0.25% in February 2019, taking the year to date performance to 1.8%. In comparison, the IA Sterling Corporate Bond sector returned +0.29% in February and 1.9% YTD.

Macro backdrop

February was another volatile month in the UK – driven yet again by Brexit-related geopolitical uncertainty. On the UK macro side, data was generally weaker than expected. Q4 2018 GDP growth was an anaemic +0.2% Quarter on Quarter, and 1.3% Year on Year. Inflation declined to 1.8% from 2.1%, while unemployment remained stable at 4.0%, with PMI survey data registering the weakest readings since July 2016.

In the US, macro data was generally robust. Q4 2018 Annualised GDP was 2.6%, beating market expectations of 2.2% growth. Inflation fell to 1.6% (partly reflecting weaker oil and fuel prices), unemployment actually increased to 4.0% from 3.9% - although this partly explained by an increase in the labour force participation rate. Average employee earnings increased by 3.2%, while PMI survey data remained relatively strong.

In the Eurozone, the data continued to highlight a declining growth picture. GDP growth for Q4 2018 was +1.2%, inflation declined to 1.4%, unemployment remained stable at 7.9%, and PMI survey data remained weak.

Portfolio activity

Turning to portfolio activity, we anticipated the increased geopolitical uncertainty in the UK and tactically increased duration in the fund to 5.3 years as of 28th February 2019. This was achieved by adding to our existing position in UK Gilts. As a result, the fund now has a 6.5% weighting in the 2071 Gilt – which alone adds 2.3 years of duration to the fund.

The average rating on the portfolio was maintained at ‘A’ (a significant improvement on the average portfolio rating of BBB in June 2018). The fund now offers a yield of 3.1%. As of 28th February 2019, 47% of fund holdings are in AAA to A- rated bonds. We believe the significantly improved credit quality of the fund further de-risks the fund from future volatility.

Outlook and strategy

While 2018 saw a significant re-pricing of corporate bonds, we remain cautious. For the first time since June 2016, valuations appear closer to fair value across all major currencies (sterling BBB credit spreads have widened to 199bps, versus 5yr average of 183bps; 10yr average of 248bps; and 20yr average of 216bps). In order to ensure capital preservation and deliver a high level of monthly income, we continue to seek out the best risk:reward ideas across investment grade, unrated and high yield bond sectors, while always maintaining our minimum of 80% Investment Grade risk. We continue to our focus on stock selection reinforced by in-depth credit research, and continue to favour shorter duration corporate bonds in GBP and USD.

Close Bond Income discrete performance as at 28 February 2019








Close Bond Income Portfolio Fund







IA £ Corporate Bond







IA £ Strategic Bond







IA £ High Yield







Source: FE Analytics 05.03.2019; all are X Acc share classes; performance is total returns, net of fees with dividends reinvested.

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Important information
This article is only intended for use by UK investment professionals and should not be distributed to or relied upon by retail clients.  The value of investments will go up and down and clients may get back less money than they invested. Past performance is not a reliable indicator of future returns. The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.

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