How to look under the bonnet of bond funds

The bond industry doesn’t tend to make life easy for the humble DIY investor. The asset class is awash with jargon (from “coupon” to “duration”) while the concepts involved in fixed income investing can certainly take some understanding. 

What’s more there are very distinct types of bond, with some very distinct behaviour in recent years.

• Invest with ii: Buy Bonds | Free Regular Investing | General Investing with ii

Touching on that point, buying a government bond or an investment-grade corporate bond is widely viewed as a more defensive place to put your cash. 

Here you are lending to a rich-nation government such as the UK or US, or to a company with a good credit score, and it seems unlikely that those borrowers will fail to pay you back.

Such bonds are, however, very sensitive to changes in interest rates – with any increase causing their prices to fall. 

That explains why funds invested in both areas have struggled in recent years, amid the rate rises of 2022 and the concerns, brought on by this year’s conflict in the Middle East, that rates could at least stay higher for longer. 

So-called high yield bonds, where you lend to companies with lower credit ratings, are much less sensitive to rate changes and have had much stronger returns.

The performance of different bond sectors over a five-year stretch reflects these dynamics.  

Source: FE Analytics, 29/06/26. Past performance is not a guide to future performance. 

The average UK gilt fund is down by almost a fifth, while UK index-linked bond funds (which have higher rate change sensitivity) are off even more. 

Corporate bond funds, which focus on investment-grade credit, are treading water over this period, while high-yield bond funds have performed well.

Not all flexible bond funds are that flexible

Investors can take bond exposure in all manner of forms, be it buying gilts (and some corporate bonds) directly, or using funds focused on the different subsectors. But those who wish for a catch-all option can also choose a so-called strategic bond fund, which can invest across the entire asset class.

These funds can, in theory, move in and out of different parts of the bond universe depending on their outlook. But in practice many of them do focus predominantly on one part of the market for now.

• Bond Boss: why gilt yields are so high, and what it means
• The smaller company funds offering big yields

With high-yield bonds performing so well, for example, a good number of these funds like to invest here. Some well-established funds with a focus on high yield such as Royal London Sterl Extra Yld Bd Z (BG5GTJ6), Artemis High Income I Inc (B2PLJN7) and Schroder Strategic Credit L Acc (B11DP10) are sitting on some very strong five-year returns.

Meanwhile, some other names focus on different specialisms. Some recent strong performers include, for example, the BNY Mellon Infl-Lnkd Corp Bd Inst W Acc (B8HY505) fund and RLBF II Royal London Shrt Dur Crdt M Acc (BJ4KW79).

A handful of names do still take a more mixed approach, and they differ quite notably.

The flexible names

Those funds with a flexible approach include M&G Optimal Income GBP I Inc (B1H0560), MI TwentyFour AM Dynamic Bond I Acc (B5VRV67), Jupiter Strategic Bond I Acc (B4T6SD5) and Janus Henderson Strategic Bond I Acc (0753382). 

As the table shows, they have very different returns over five years, with the top names comfortably outperforming the average portfolio of gilts, and of investment-grade corporate bonds, if falling slightly behind the high-yield sector.

For investors who simply want some diversification and a broad level of exposure to the asset class, that might seem like enough.

Digging down into the funds, it can be prohibitively difficult to work out exactly what they hold, and what the investment team’s view is. Note, for example, that monthly commentaries don’t seem to be available from M&G Optimal Income, while finding insights from the Jupiter team seems equally trying. 

Source: FE Analytics, 29/06/26. Past performance is not a guide to future performance. 

But factsheets for the funds do give us a very broad sense of where they are invested. M&G Optimal Income has around half its portfolio in government bonds, with 38.7% in investment-grade corporate bonds and just 4.6% in high yield. The fund lists its duration, or level of sensitivity to interest rate changes, as 7.13 years, the highest level among the flexible funds we list here.

Jupiter Strategic Bond has a much lower 35.6% allocation to government bonds, with 53.8% in corporate debt. A breakdown of the portfolio by credit rating suggests the fund has a good level of exposure to high-yield debt – although it’s unclear whether this breakdown applies to just the corporate bonds or the entire portfolio. These disclosure shortcomings do crop up regularly in the sector.

The Jupiter team has long made the case that the economy would encounter big, structural deflationary trends, something that should benefit government bonds. However, the fund has tended to run a “barbell” approach, basically diversifying across the asset class.

One of its most obvious rivals, Janus Henderson Strategic Bond, was also betting on government bonds just a few years ago. But the latest factsheet suggests that it no longer invests directly in government bonds, with a breakdown of its sector exposures listing categories such as “industrial”, “financial institutions”, “MBS passthrough”, “CLO” and “utility”.

• Fund Focus: where Baillie Gifford has - and hasn’t - recovered
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

There’s an argument that bond investors can make good money in more obscure, less well understood parts of the market, and you could claim that TwentyFour Dynamic Bond does just that.

Around a fifth of the fund sits in government bonds, with roughly 11% in investment-grade corporate bonds and a similar allocation to high yield. But the fund breaks out other allocations differently, from a 26.3% allocation to bank debt to 15.8% in asset-backed securities and a very small weighting to emerging market debt. The fund might seem especially confusing to some but its diversification has often paid off.

It’s worth discussing a few metrics that investors will often find in factsheets for these funds. There’s the credit rating breakdown, the duration (or level of rate sensitivity) and in some cases the yield available. But disclosures can be made in quite different ways, making it difficult to compare the funds that clearly.

Turn to the macro

Macroeconomics are especially relevant for bond investors, given how important interest rate moves can be here. And some funds take an especially macro-driven approach to investing here.

A couple of names to make note of here would be Fidelity Strategic Bond, headed up by former Allianz manager Mike Riddell, and M&G Global Macro Bond. 

The M&G sits outside the Investment Association’s (IA) Sterling Strategic Bond sector, meaning it has no obligation to focus on sterling-denominated debt. That, in theory, gives it more of a global outlook than some rival funds.