The risk of chasing high-yield returns

Investors attracted by the great performance of bond funds in the last year should be on their guard. There has been no shortage of warnings about the potential for disappointing returns from low-risk corporate bonds over the coming months. But with asset managers trumpeting the potential of absolute return funds, investors can be forgiven for being confused.

Strategic and high yield bond funds are interesting because most companies have taken investor-friendly action over the past two years to cut costs and preserve profit margins. But there are a number of serial poor performers out there. The standout dog fund in the strategic sector is the Axa Sterling Strategic Bond fund run by Julie Lamirel, which would have lost £73 from an initial £1,000 investment over five years – and that is without adding capital erosion suffered as a result of inflation. The difference between the best fund in the sector over five years and Lamirel's fund is £508.

Lamirel, a senior manager of the fund, says that the underperformance has been the result of being overweight in financials during the economic downturn, particularly banks. Worse still, the fund then reduced its exposure to financials in the second half of 2008 and so didn't benefit from the uplift.

"When we went into the crisis we had the wrong positioning," Lamirel says. "We then reduced financials and if the crisis had been tougher, we would have been right – but the recovery was quicker. We still see the risk of another downturn, so don't want to take big bets."

Over 10 years, Axa can also be found at the bottom of the table, this time courtesy of its Framlington Managed Income Fund, managed by George Luckraft. Unlike the fund managed by Lamirel, however, Luckraft's performance has improved considerably over the past year, reaching the top 10 per cent in the sector over the past six months.

Axa escapes the dog fund list for the High Yield sector, but the track record of Gartmore's High Yield Corporate Bond fund is nothing short of woeful. As the worst fund in the sector over one year, three years, five years and 10 years, even the investment house has changed the management and structure of the fund. Gartmore's High Yield Corporate Bond fund could only manage growth of 17.5 per cent in the 12 months to the end of February, in a sector where the average growth rate was 40.6 per cent. Worse still, the fund was the only fund in its sector that isn't in positive territory over five years.

It is not surprising then that Gartmore switched to a new fund manager last July and rejigged the fund's investment objective in November.

There are better options for investors looking for strategic and high yield funds. For strategic investors, Invesco Perpetual's Monthly Income Plus was the best performer over 10 years. For those that can stomach slightly more risk and volatility, Baillie Gifford's High Yield Bond fund could be the answer. While its five-year return of £1,283 from £1,000 may seem modest, it is better than the sector's worst performer. But the fund had a stunning 12 months to the end of February, resulting in a 49.4 per cent return – only five funds did better.

This research is taken from the April edition of 'What Investment' magazine, in newsagents from Friday 26 March.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
people

Actress sees off speculation about her appearance in an amazing way

Arts and Entertainment
Serge Pizzorno of Kasabian and Noel Fielding backstage at the Teenage Cancer Trust concerts
musicKasabian and Noel Fielding attack 'boring' musicians
News
peopleLynda Bellingham's tragic final Loose Women appearance moves audience to tears
Arts and Entertainment
'Right Here' singer Jess Glynne is nominated for Best Newcomer at the MOBO Awards 2014
musicExclusive: Jess Glynne hits out at 'ridiculous' criticism of white artists nominated for Mobo Awards
PROMOTED VIDEO
Arts and Entertainment
Separated at birth? Frank Sivero (left) claims The Simpsons based Mafia character Louie on his Goodfellas character
arts + entsFrank Sivero sues Simpsons studio over allegedly basing mobster character on Frank Carbone
News
Carl Bernstein (left) and Bob Woodward (right) with former 'Washington Post' executive editor Ben Bradlee
people

The Washington Post editor helped Bob Woodward and Carl Bernstein bring down President Nixon

News
news

Voices
Stephanie first after her public appearance as a woman at Rad Fest 2014
voices

Arts and Entertainment
Laura Wood, winner of the Montegrappa Scholastic Prize for New Children’s Writing
books

Children's bookseller wins The Independent's new author search

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

    Trainee Recruitment Consultant Birmingham

    £18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

    Trainee Recruitment Consultants

    £20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

    Helpdesk Analyst

    £23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...

    Day In a Page

    Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

    A new American serial killer?

    Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
    Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

    Sting to trap paedophiles may not carry weight in UK courts

    Computer image of ‘Sweetie’ represented entrapment, experts say
    Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

    Return to Fukushima – a land they will never call home again

    Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
    Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

    Wildlife Photographer of the Year

    Intimate image of resting lions claims top prize
    Online petitions: Sign here to change the world

    Want to change the world? Just sign here

    The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?
    Ed Sheeran hits back after being labelled too boring to headline festivals

    'You need me, I don’t need you'

    Ed Sheeran hits back after being labelled too boring to headline festivals
    How to Get Away with Murder: Shonda Rhimes reinvents the legal drama

    How to Get Away with Murder

    Shonda Rhimes reinvents the legal drama
    A cup of tea is every worker's right

    Hard to swallow

    Three hospitals in Leicester have banned their staff from drinking tea and coffee in public areas. Christopher Hirst explains why he thinks that a cuppa is every worker's right
    Which animals are nearly extinct?

    Which animals are nearly extinct?

    Conservationists in Kenya are in mourning after the death of a white northern rhino, which has left the species with a single male. These are the other species on the brink
    12 best children's shoes

    Perfect for leaf-kicking: 12 best children's shoes

    Find footwear perfect to keep kids' feet protected this autumn
    Anderlecht vs Arsenal: Gunners' ray of light Aaron Ramsey shines again

    Arsenal’s ray of light ready to shine again

    Aaron Ramsey’s injury record has prompted a club investigation. For now, the midfielder is just happy to be fit to face Anderlecht in the Champions League
    Comment: David Moyes' show of sensitivity thrown back in his face by former Manchester United manager Sir Alex Ferguson

    Moyes’ show of sensitivity thrown back in his face... by Ferguson

    Manchester United legend tramples on successor who resisted criticising his inheritance
    Two super-sized ships have cruised into British waters, but how big can these behemoths get?

    Super-sized ships: How big can they get?

    Two of the largest vessels in the world cruised into UK waters last week
    British doctors on brink of 'cure' for paralysis with spinal cord treatment

    British doctors on brink of cure for paralysis

    Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
    Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

    Lonely Planet’s Best in Travel 2015

    UK city beats Vienna, Paris and New York to be ranked seventh in world’s best tourist destinations - but it's not London