Bond Funds a license to thrill?

Bond Funds a license to thrill? 2003-04-01

Bonds issued by countries and companies have surprised many of their critics, by delivering some very respectable returns over the last 15 years.

Since 1990 investors in bonds and bond based funds have enjoyed a high initial income together with capital growth.

Over the past decade, fixed income markets have changed dramatically, with a wider variety of bonds and issuers than ever before. Companies and institutions are raising capital in ever more sophisticated ways through an increasing range of debt vehicles. This has led to a myriad of bond funds specializing in everything from government bonds to high yield corporate bonds and everything in between.

Unless you have a good understanding of fixed interest securities, pooled funds such as mutual funds and Unit trusts are the best way for most individual investors to gain exposure to the Bond markets. By investing this way, individuals can get more diversification, across different types of fixed income assets.

We have found two Bond funds based in Guernsey that have excellent track records and will give you a good diversity across the spectrum of fixed income assets:

#1 Investec Asset Management (Global Strategy fund, Guernsey ).

Global High Income Bond Fund. US$.

This fund has out performed its composite index consistently over the past 3 years, recording returns of 16.7%, 28.2% and 13.5% per annum.

The fund aims to achieve a high level of current income by means of investment in high yielding fixed or floating rate securities of varying maturities,denominated in a spread of the world’s major and minor, freely traded currencies.

Top Ten Holdings.

• Treasury Notes 3% 2006
• (Commonwealth) 7.5% 2009
• (State of) 9.75% 2030
• (Republic of) 5.75% 2008
• (Republic of) 12% 2010
• Bank Nederlandse Gemeenten 5.25% 2009
• Dexia Municipal Agency 4.875% 2008
•  Aries Vermogensverwaltung 9.6% 2014
• United Mexican States 6.37% 2013
• RWE Finance 6.37% 2013

Average duration = 3.74 years.

Average credit rating = BBB+

This fund would make a great core holding for any conservative investor’s portfolio.

#2 Investec Asset Management (Global Strategy Fund Guernsey )

Sterling High Income Bond Fund.

This fund has performed strongly over the last two years, returning 15.7% & 24.37% respectively.

The fund aims to generate a high level of income with the opportunity for Capital gains from a diversified portfolio consisting of a broad range of fixed interest and other high yielding securities denominated in any currency, but hedged back into Sterling .

Top Ten Holdings.

• TVN Finance 9.5% 15/12/2013
• Lighthouse International 8% 2014
• Debenhams Finance 10.5% 2012
• Eco – Bat Finance 10.125% 31/01/2013
• Rhiag 10.75% 2007
• Brakes Bros Finance 12% 2011
• Agrokor D.D 11% 2007
• Ineos Vinyls Finance 9.125% 01/12/2011
• Aspropulsion 9.625% 01/10/2013
• Focus Wickes Finance 10% 28/07/2011

Average duration = 2.83 years.

Average credit rating = BBB+

This fund would make a great core holding for any conservative investor’s portfolio.

*Note: It is denominated in Sterling .

Investec Asset Management (Guernsey ):Sterling High Income Bond Fund

Objective

The Fund aims to generate a high level of income with the opportunity of capital gains from a diversified portfolio consisting primarily of sterling denominated fixed interest securities.,

Adviser’s comments

European high yield bonds delivered strong investment returns over the last quarter.

Demand for the relatively small population of high yield bonds continued to outweigh supply as low interest rates drove investors out of cash to seek high yield investments. A declining average default rate, the result of an improving economic environment and corporate restructuring, which improved balance sheets, also encouraged demand.

The Fund did not match the upward surge in the index, mainly due to its cautious strategy in the first quarter.

The Manager had focused the bulk of the Fund’s holdings on quality issues with defensive characteristics in the financial and consumer non-cyclicals sector in response to nervousness about war in and concerns that the global economy would sink back into recession. However, as economic sentiment improved following the war in , the Fund increased its holdings of more economically sensitive sectors and some insurance companies, which were benefiting from the better tone in equity markets.

We believe that the prospects for continued strength in the high yield index are good. Global interest rates remain at record lows, a significant combination of fiscal andmonetary stimulus is expected to improve growth in the and further corporate restructuring is likely to reduce the average default rate.

Top Ten Holdings.

• ABB International Finance 10% 2009
• Crown Euro Holdings 1 0.25% 2011
• Nyco Holdings 11.5% 2013
• Fimep 11% 2013
• Rhiag 10.75% 2007
• Big Food Group 9.75% 2012
• Bluewater Finance 10.25% 2012
• Eco-Bat Finance 10.125% 2013
• RHM Finance 11.5% 2022
• Gal Finance 11.5% 2009

This fund had negative returns in 2001 and 2002, but we feel that the economic climate is right for a return to favour of High Yield Bonds.

Investec has a good track record for its Bond funds.

Buy Investec Sterling High Yield Bond Fund for a diversified exposure to high yield bonds.