Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.

• Co-manager Eric Holt is a seasoned bond investor with over three decades of investment experience
• The fund invests across the bond market, including in higher-risk unrated bonds
• The fund has performed well since its launch in 2003, outperforming its IA Strategic Bond peer group
• The fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Royal London Sterling Extra Yield Bond fund offers the potential to deliver a high income for investors, but its approach means it’s also higher risk. The fund could be used to diversify a bond portfolio, or a more adventurous shares portfolio seeking exposure to other asset classes. We think the fund could be more volatile than some other bond funds.

Please note as an offshore fund you are not normally entitled to compensation through the UK Financial Services Compensation Scheme.

Manager

The fund is co-managed by the experienced Eric Holt and Rachid Semaoune. Holt joined Royal London in 1999 and his investment career stretches over three decades. He’s been manager of the fund since its launch in 2003 and also has responsibility for Royal London’s credit research process. 

Semaoune began his investment career in 2001 at Gulf International Bank before later joining UBS Asset Management to manage investment grade bond portfolios. He joined Royal London from UBS in 2015 and became manager of this fund in 2019. 

Eric Holt and Rachid Semaoune also have the help of a team of analysts and other fund managers at Royal London. Both managers also run other fixed income strategies at Royal London.

Process

The managers look for opportunities across the credit market by investing in a combination of investment grade, sub-investment grade and unrated bonds (bonds without a credit rating) where they believe valuations are attractive. They don’t rely on credit ratings and consider if the reward on offer is sufficient for the risk of owning a bond. As of the end of May, 34% of the fund was invested in unrated bonds.

They tend to focus more on the prospects for individual bonds, rather than taking wider views on things like duration (a bond’s sensitivity to a change in interest rates). Holt and Semaoune therefore aim to add value for investors by investing in bonds others don’t fully understand that they think could go on to perform well in the future. They hold a wide range of bonds in the fund, so returns don’t rely on the performance of a single investment. The fund invests in high-yield and unrated bonds, both of which can increase risk.

Holt and Semaoune have been active in identifying new opportunities to add to the portfolio. Recent purchases include the newly issued bonds of offshore energy services business Vantage Drilling, and of UK North Sea oil and gas business Waldorf Production. The managers also invested in some bonds from insurance group AXA and property company Bruntwood. They also sold some bonds issued by financial companies such as Barclays, HSBC and Lloyds, after these bonds had risen in value. Investments in bonds from energy services businesses BW Offshore and Welltech were also sold at a profit. 

The managers think that inflation has peaked, partly because they expect energy prices to fall. They do however expect interest rates to rise a bit more from current levels as the Bank of England continues to focus on bringing inflation under control. They also think that the higher interest rates will cause the UK economy to slow down and company earnings to reduce. That being said, they believe that yields on offer in bond markets compensate investors for the increased potential that companies will default on their bonds.

Culture

We believe Royal London’s speciality is in managing fixed income portfolios. Their philosophy is that all well-diversified portfolios should include an element of income. They use a combination of top-down macroeconomic analysis and bottom-up security selection to manage their bond portfolios which has served them well over time.

The managers are rewarded based on the long-term performance of their fund, so their interests are aligned with investors. We think their incentivisation structure is better than most and encourages good behaviour, but it isn’t as long term as in some other groups.

ESG integration

The managers consider environmental, social and governance (ESG) factors in their analysis. This helps them identify potential risks that could affect the business’s ability to repay its debts, increase costs or result in future litigation.

All Royal London fund managers have access to ESG ratings and analysis produced by the firm’s central Responsible Investment team. The firm asks that all managers incorporate this into their investment decision making processes, but our meetings with Royal London fund managers suggest the quality of ESG integration from fund to fund is mixed. The firm’s sustainability branded funds fully integrate ESG, with the support of the Responsible Investment team.

The Responsible Investment team coordinates company engagement and engagement case studies can be found in the firm’s annual Stewardship and Responsible Investment report. The firm also publishes a summary of voting activity on its website, and an interface allows visitors to search for all voting activity relating to a specific company, or any time period, and includes a rationale in cases where the team voted against a proposal or abstained.

While this is not one of Royal London’s sustainability branded funds, we do think that ESG related risks are suitably considered as part of the bond selection process. That being said, the fund may still hold bonds that could be considered ESG sinners.

Cost

This fund has an ongoing annual charge of 0.84%, but we’ve secured HL clients an ongoing saving of 0.44%. This means you pay a net ongoing charge of 0.40%. The HL platform fee of up to 0.45% per year also applies.

Performance

Eric Holt has delivered good returns to investors over the long term. Since the fund’s launch in April 2003, he’s delivered returns of 258.39%* to patient investors, compared with the IA £ Strategic Bond peer group average return of 136.60%. Past performance is not a guide to the future. All investments fall as well as rise in value, so you could get back less than you invest.

Over the 12 months to the end of May 2023, the fund has delivered a return of -0.20%, ahead of the IA £ Strategic Bond peer group average return of -4.07%. High inflation and rising interest rates have posed unwelcome headwinds to fixed income markets over the last year. Investments in the industrials sector added the most value for the fund over the 12 months to the end of May. However, investments in bonds issued by companies in the banking and insurance sectors lost value and offset gains from other bonds.

The fund can be more volatile than other bond funds, which we saw during the 2008 financial crisis and at the start of 2020 amid the coronavirus pandemic. This means we don’t think the fund is likely to offer shelter in an economic or bond market downturn.

Investments in some areas of the market that other investors tend to overlook, like unrated and higher yielding bonds have helped deliver strong returns for investors in the fund. But these investments are less liquid, meaning they can be more difficult to trade in large volumes.

At the end of May, the fund had a yield of 7.60%, although yields are variable, not guaranteed, and are not a reliable indicator of future income.

Past performance is not a guide to the future. Source: *Lipper IM to 31/05/2023. Total returns with income reinvested.

Find out more about Royal London Sterling Extra Yield Bond, including charges

Royal London Sterling Extra Yield Bond Key investor information

Important information – Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.

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