GAM Star Credit Opportunities GBP
1-year return: 8% | 3-year return: 24.6%
This fund is a longstanding winner of our awards. It was crowned Best Larger Sterling Bond fund in 2015 and 2016, and Best Sterling Bond Fund in 2017 when we judged funds of all sizes under one category. This year it retains that title. The £1.1 billion fund is also no stranger to our Rated Funds, featuring every year since 2016. Not only does it consistently rank in the first quartile of its peer group, but its investment approach makes it well-suited to current market conditions.
Managers Anthony Smouha and Gregoire Mivelaz aim to provide investors with a good level of income from high-quality companies. The duo looks for companies that are doing well, in the belief that they are unlikely to default on their debt. But instead of buying the ‘senior’ bonds of these businesses, which are first in line for repayment if a company goes bust, they opt for their ‘junior’ or ‘subordinate’ bonds in order to secure a higher yield without taking on meaningfully more risk.
They say this approach is more akin to an equity fund manager’s, because it means focusing on the health of the company rather than what would happen if something goes wrong, as bond managers tend to.
It is a ‘safety first’ fund with very low turnover, as the managers’ process looks for bonds they can buy and hold for 10 years. They typically buy bonds that yield 6 per cent or more at purchase, giving them far less interest rate sensitivity than many of their peers. The fund yields 4.1 per cent at present.
HIGHLY COMMENDED FUND
Royal London Sterling Extra Yield Bond
1-year return: 8% | 3-year return: 22.1%
This fund won Money Observer’s Best Larger Sterling Bond Fund award in 2014 and was highly commended in 2016. It is a worthy runner-up this year, having narrowly missed out on the top spot due to a brief period in 2015 when it underperformed the IA sterling strategic bond sector. A Rated Fund since 2013, it has beaten its peer group average by 6.7 per cent over one year and 9.3 per cent over three.
It is managed by Eric Holt, who has three decades of experience in bond markets. He offers a different perspective on bond market investing because he focuses on more esoteric, undervalued and overlooked areas. These include bonds without a credit rating.
Holt aims to provide investors with a high yield without taking the degree of risk normally associated with high-yield funds. For this reason, he favours bonds that are secured against specific assets, such as property or cash flows. The fund is yielding 5.6 per cent at present.