Seven bond funds to play sector that’s lagged the pack

UK corporate bonds experienced the steepest maximum drawdown among major regions over the past five years and have shown the weakest recovery.

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The Morningstar UK Corporate Bond Index fell -29% from its peak in January 2021 to its trough in September 2022, compared with declines of -21.4% for US corporate bonds (January 2021–October 2022); -19.4% globally (Aug 2021–Oct 2022); and -16.1% in the eurozone (August 2021–September 2022). Even with recent gains, recovery remains slower than peers.

Weak growth, fiscal concerns and political uncertainty have kept UK bond yields high. Sector allocations weighed on returns, as autos and energy faced pandemic aftershocks. Meanwhile, ahead of the Autumn Budget markets were rattled by conflicting policy leaks and concerns around fiscal discipline.

Yields remain attractive

Corporate bond yields remain appealing from a historical perspective, supporting the prospect of stronger expected total returns.

Duration risk (sensitivity of bonds to interest rate changes) remains a critical consideration for portfolio managers. In response, many have shifted towards more balanced, tactical approaches.

Investors may be surprised to discover that the sterling corporate bond market is more globally diversified than it appears. Only 45% of the Morningstar UK Corporate Bond Index’s holdings come from UK issuers, while 23% originates from US-based companies. The index’s make-up provides meaningful diversification away from UK-only risk, helping mitigate the impact of domestic economic or political uncertainty.

Flows and fees

From a peak of around £69 billion five years ago, assets under management in the sterling corporate bond category now stand at £47 billion at the end of the third quarter. The decline is primarily driven by net outflows over the period, compounded by negative market performance.

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There’s also been a notable shift towards passive investing. While active funds experienced £13.8 billion in outflows over the past five years, passive funds posted nearly £1.7 billion of inflows and now account for more than one-third of category assets.

However, options remain highly concentrated, with the five largest passive trackers controlling 78% of passive asset under management. Meanwhile, fee compression has reduced median fund fees in the category to 37 basis points from 50 basis points five years ago.  

Why active management still matters

Despite the structural rise of passive strategies, active funds have demonstrated meaningful advantages in this category. The sterling corporate bond category achieved a 59.4% success rate, indicating that most active strategies in this category have outperformed passive peers and survived throughout the measurement period. Beyond bottom-up security selection, managers also benefited from active duration management and used flexibility to add credit risk.

Active managers have particularly leveraged opportunities in high-yield and subordinated financial bonds, an approach that proved profitable as investors embraced risk following the pandemic.

Leading strategies in the sterling corporate bond space

Royal London Corporate Bond M Acc

A long-established, research-driven strategy with a bias towards secured bonds and under-researched credits, supported by a strong team framework. Consistent outperformance relative to peers and benchmark.

Invesco Corporate Bond UK Z Acc

High-conviction, flexible approach unconstrained by the benchmark, with notable use of subordinated financials and strong long-term returns.

M&G Corporate Bond GBP I Acc

Led by veteran Richard Woolnough, with active macro-driven management of duration and credit risk. Long-term performance has exceeded both peer group and benchmark.

BlackRock Corporate Bond D Acc

Blend of top-down macro views and bottom-up issuer selection, typically with a lower duration stance and broad diversification. Strong risk-adjusted returns.

Fidelity Moneybuilder Corporate Bond W-ACC-GBP

A stable, income-focused strategy with a high-quality bias, modest high-yield use, and strong risk-controlled positioning.

RLBF II Royal London Short Duration Credit M Acc

Differentiated bottom-up approach with emphasis on secured and structured bonds, and strong long-term performance — aligned with current demand for short-duration exposure.

Vanguard UK Investment Grade Bond Index £ Acc

A low-cost passive option offering diversified exposure across corporate and semi-government bonds, although active approaches still retain an advantage in flexibility and opportunity extraction.

Giovanni Cafaro is analyst for fixed-income strategies at Morningstar.