Bond funds available to stocks and shares ISA

[TheMotorcycleBoy]

Hi,

Mel and I have come to the realisation that whilst our ISA platform (iWeb) is quite cheap and convenient to use, it also does not offer us a great deal of choice of UK retail bonds for us to purchase. So we've decided that rather than swapping platform provider, we should, for now, increase our bond allocation by making purchases into "bond funds". I wondered if anyone could give us a low-down on what choices we will probably have.

For instance, we have some units of "Fidelity World Equity Index tracker", and we chose the "reinvest dividends" version of the fund, instead of the "income" version. I had a quick look at one or two bonds available to us, from iWeb, hmm...

BlackRock Corporate Bond D Acc (Accumulation)
Price as at 24 September 2018
ISIN: GB00B4QC3311

BlackRock Corporate Bond D Inc (Income)
Price as at 24 September 2018
ISIN: GB00B4T5JV79

yes, I see that's pretty clear, similar choices with bond as well as equity funds, i.e. Acc or Inc.

Ok, so when I drilled down into the BlackRock Corporate Bond D Acc (Accumulation) for it's details, I see that return/yield is being described twice:

5 year annualised return       12 month yield
6.01%                                   3.03%

So what does the above mean? 3% annual yield seems reasonable, if the fund is reinvesting the coupons. But what is the 6.01% 5 year annualised return detail all about? (Is it typically the average yield taken over the past 5 years?)

And finally, can anyone make us a recommendation for a high-yield (we appreciate the risk angle, but if the risk is diversified that seems less worrying to us) bond fund? i.e. as low management charge/fees as possible, and high yielding bonds across sectors and locations? I'm asking this since in addition to recommendations generally being nice, I'm finding iWeb's bond fund search/filtering web pages, somewhat painful to use!

many thanks
Matt and Mel

[TheMotorcycleBoy]

For example, these are described as high yield (though the risk ratings seemed comparatively low) and available on iWeb

AXA Pan European High Yld Bond Z Grs Acc	GB00B6XDWS91 	Other Bond 	
Baillie Gifford High Yield Bond B Acc	GB00B1W0GF10 	GBP High Yield Bond 	
Newton Global High Yield Bond Int W Acc	GB00B7KWF216 	GBP High Yield Bond 	
Kames High Yield Bond GBP D Acc GB00B4N9RG69 	Global High Yield Bond - GBP Hedged 	
M&G European High Yield Bond GBP I Acc GB00B76MD544 	EUR High Yield Bond 	
Threadneedle HY Bd Z Grs Acc GBP	GB00B82VC222 	GBP High Yield Bond

so are these type of bond funds probably the highest yielding available on the typical online ISA platforms?

M&M

[Alaric]

For example, these are described as high yield (though the risk ratings seemed comparatively low)

Assuming risk ratings refer to volatility, Bond funds are always going to show up as low risk, because unless interest rates and default risk assessments move all over the place, then Bond prices will not show the same movements as share prices.

If you want a higher return from fixed interest, then junk bonds are the place to look. These are bonds where there's a perceived finite chance that the income and capital won't be repaid either at all or in full. I don't know if any OEICs go out that far in search of yield, but there's probably a specialist IT or several.

[mc2fool]

Ok, so when I drilled down into the BlackRock Corporate Bond D Acc (Accumulation) for it's details, I see that return/yield is being described twice:

5 year annualised return       12 month yield
6.01%                                   3.03%

So what does the above mean? 3% annual yield seems reasonable, if the fund is reinvesting the coupons. But what is the 6.01% 5 year annualised return detail all about? (Is it typically the average yield taken over the past 5 years?)

No, nothing is being described twice.

Yield refers to the "income" from the investment - dividends/coupons/interest - expressed as a %age of the current price.

Return refers to the total return from the investment, being capital gain (/loss) plus income, in this case as an annualised %age.

Whether the fund is reinvesting income or not is irrelevant to both as a %age.

[TheMotorcycleBoy]

If you want a higher return from fixed interest, then junk bonds are the place to look

Yes. We already have IPF and PMO bonds which I assume are categorised as "junk", as their coupon rates are both over 6% (IIRC).

However as I said in my OP, iWeb seems to be reducing the choice of retail bonds.

So.......do you know of any "junk bond funds"? And even better can you state their codes e.g. GB00B6XDWS91 or whatever so we can see iWeb sell them?

thanks
M&M

[TheMotorcycleBoy]

No, nothing is being described twice.

Yield refers to the "income" from the investment - dividends/coupons/interest - expressed as a %age of the current price.

Return refers to the total return from the investment, being capital gain (/loss) plus income, in this case as an annualised %age.

Whether the fund is reinvesting income or not is irrelevant to both as a %age.

Ok thanks, that makes sense now.

[TheMotorcycleBoy]

So my rephrasing my earlier question, i.e. availability of "junk bond funds". Do funds exist, which pool together collections of high risk/return bonds, for example bonds of this ilk:

ERO1 	XS1112834608
IPF1 	XS0919406800
ENQ1 	XS0880578728
PMO1 	XS0997703250

?

[gbjbaanb]

Yes, for example the "Threadneedle High Yield Bond Fund Retail Income GBP", GB0008371014

Its 4.44% return but its Morningstar box shows low credit sensitivity, but also low credit quality. Whether that means much seems to be pretty irrelevant as its returned 4.46% annualised over 3 years.

Another is Kames High Yield Bond Fund (GB0031425233), 4.69% yield.

or even Legal & General Emerging Markets Government Bond (GB00B7GWV161) at 4.55%.

What is clear from these is that "high risk" doesn't really return in super high returns these days. Even Russian and Argentinian bonds only get 4.55%, but that even high risk bonds are going to be low risk compared to anything else. A morningstar article I got the Threadneedle and Kames funds from likes those 2 the best.

More risky ones seem to invest in "below investment grade securities" such as

JPM Global High Yield Bond Fund X (GB00B23W5125) which yields 5.75% or Schroder High Yield Opportunities Fund Class Z (GB00B83RDY83) yielding 6.28%, though these returns are more volatile that the others.

[Alaric]

Do funds exist, which pool together collections of high risk/return bonds,
?

A search for "high yield corporate bond funds" comes up with this list

http://www.morningstar.co.uk/uk/fundqui ... EUCA000607

Just picking one
http://www.morningstar.co.uk/uk/funds/s ... F0GBR04J0T
the description says

The objective is to produce a high level of return by investing in a diversified portfolio consisting primarily of sub-investment grade bonds.

There's a 1% annual charge which will eat into the returns, but such portfolios can be research intensive.

[everhopeful]

There are some investment trusts that hold junk bonds. City Merchants High Yield, Invesco Perpetual Enhanced Income and New City High Yield come to mind. f you are looking for high yield fixed interest what about preference shares. These have much tighter spreads than individual bonds and don't trade at a premium to NAV. Raven Property, REA holdings, Ecclesiastical Insurance, Nat West and LLoyds all have high yields.

[TheMotorcycleBoy]

There are some investment trusts that hold junk bonds. City Merchants High Yield, Invesco Perpetual Enhanced Income and New City High Yield come to mind. f you are looking for high yield fixed interest what about preference shares. These have much tighter spreads than individual bonds and don't trade at a premium to NAV. Raven Property, REA holdings, Ecclesiastical Insurance, Nat West and LLoyds all have high yields.

Hi Everhopeful,

Sorry to be slow today, when you say "Raven Property, REA holdings, Ecclesiastical Insurance, Nat West and LLoyds" are they all preference shares? Do you know any of the ticker codes off the top of your head?

M&M

[everhopeful]

Tickers are RAVP, ELLA, NWBD,LLPD and RE.B.

https://www.fixedincomeinvestor.co.uk/x ... oupid=3448 is a useful list.

[flyer61]

Mel,

make sure you read the recent threads on Preference shares.

[Wozzitworthit]

Mel

Agree you should read the threads on preference shares - if you didn't follow them at the time, allow yourself until Christmas to read and digest them all

If you then still have the will to live, you might want to consider the following investment trusts.

None of these are pure bond funds and/or trackers as such, but you may find something of interest amongst them

I prefer to have individual holdings and manage my own portfolio, however, the choice is limited and these ITs of course can buy into the investments that would preclude me owing to the minumum size to purchase and also to currency considerations etc



NB Global Floating Fund Ltd NBLS
Axiom European Financial Debt Fund AXI
CVC Credit Partners European Opportunities Ltd CCPG
JP Morgan – Global Convertibles Income JGCI
TwentyFour – Select Monthly Income Fund SMIF
ICG-Longbow Senior Secured UK Property Debt Investments Limited LBOW

Cheers

Woz

[hiriskpaul]

As with bonds, the main selection criteria with funds are credit quality and duration. A recent development with funds is currency hedging, so you can hold foreign currency bonds which much of the currency risk taken out. Whether you want currency risk or not is another question. There will be some costs involved in the hedging, but these costs will likely be lower than yours if you did your own hedging. I want some currency risk and as most of my FI portfolio is GBP denominated, I only hold non-hedged ETFs (US Treasuries and US investment grade only at present).

As you are using iWeb, you might like to look at Vanguard's FI funds. Cheap for bond funds and most are currency hedged, but sovereign and investment grade only. If you want high yield, iShares offer some ETFs with currency hedging. For EM debt, Vanguard have a particularly cheap ETF that might be of interest (VDET). It covers the more liquid sovereign and quasi-sovereign USD denominated market, so currency risk is GBP/USD rather than local EM currencies.

p.s. Don't know much about actively managed ITs/UTs, but TwentyFour Asset Management have a good reputation.

[everhopeful]

IMHO reading the recent threads on Preference shares would be counter productive. A lot of entrenched and unhelpful views were expressed. To give up on a class of share that can easily yield at least 6% because of the antics of Aviva seems ill considered. If anything one might take the view that they are safer than ever after Aviva. I hold all the ones I mentioned and am happy to continue to do so.

[TheMotorcycleBoy]

As with bonds, the main selection criteria with funds are credit quality and duration. A recent development with funds is currency hedging, so you can hold foreign currency bonds which much of the currency risk taken out. Whether you want currency risk or not is another question. There will be some costs involved in the hedging, but these costs will likely be lower than yours if you did your own hedging. I want some currency risk and as most of my FI portfolio is GBP denominated, I only hold non-hedged ETFs (US Treasuries and US investment grade only at present).

Thanks Paul, TBH this is a bit over our heads.

Help me out - when you say "currency hedged" are you saying, that since our currency goes up and down against foreign ones, the hedging thing is basically insurance, i.e. there's a slight cost in the fund which covers this insurance, and hence the yield the investor sees may be slightly reduced?

M&M

[hiriskpaul]

As with bonds, the main selection criteria with funds are credit quality and duration. A recent development with funds is currency hedging, so you can hold foreign currency bonds which much of the currency risk taken out. Whether you want currency risk or not is another question. There will be some costs involved in the hedging, but these costs will likely be lower than yours if you did your own hedging. I want some currency risk and as most of my FI portfolio is GBP denominated, I only hold non-hedged ETFs (US Treasuries and US investment grade only at present).

Thanks Paul, TBH this is a bit over our heads.

Help me out - when you say "currency hedged" are you saying, that since our currency goes up and down against foreign ones, the hedging thing is basically insurance, i.e. there's a slight cost in the fund which covers this insurance, and hence the yield the investor sees may be slightly reduced?

M&M

Sort of yes. Let's say you buy a USD denominated bond. All cash flows are in dollars, so if the pound appreciates against the dollar over the the holding period you could end up losing money, GBP money, even if you hold to maturity. To avoid this you can hedge each cash flow back to GBP. This is done using FX forwards, which is an agreement to swap 2 amounts of cash at some future date. So if you have a $10k flow in one year, you would do an FX forward deal to swap $10k into a pre-agreed amount in GBP in one year.

The fund manager will use FX forwards and perhaps other derivatives to hedge away the FX risk, but probably not every cash flow as that would be expensive.

[TheMotorcycleBoy]

By the way, I just wanted to say thanks to everyone for helping us out in the funds lists. I've been bunging some of the codes into iWeb. A surprising number did not come up, TBH.

This was one that did, and regards yields and returns it looks the most interesting:

Schroder High Yield Opportunities Z Acc GB00B83RDY83 (yield 6.28% )

Top 5 Holdings	%
Spain (Kingdom of) 2.9%	1.83
AlmavivA S.p.A. 7.25%	1.73
GARFUNKELUX HOLDCO 2 S.A. 11%	1.58
Safari Holding Verwaltungs GmbH ... 	1.47
EnQuest PLC 7%	1.40

Fixed Income
Effective Maturity	15.60
Effective Duration	4.20

I couldn't find in the bumpf any information about how many holdings the fund has, but I guess it must be 100 or so.

I did do a quick search on Schroeders as a firm, but excepting the general cheesiness of their site, I couldn't find much stuff online really saying whether they are good or bad.

Can anyone help me out with what the fees mean?

Ongoing Charge Figure (OCF): 	0.72%
Performance Fee: 	N/A
Transaction Fee: 	0.5% (based on industry average)

My guess is that OCF is a charge made annually against the current value of the fund, correct? But what's transaction fee? Does that mean each time the fund needs to purchase another tranche of bonds I get another 0.5% charged? This sounds a bit more ominous.

[TheMotorcycleBoy]

Thanks for the pref share links. To be honest we are going to stick to these names I think, mainly because I'm (slightly) more knowledgeable about these firms, than the others:

LLYD BKG9.75PREF
AVIVA8.375PREF
NAT.WEST 9%PF

I'm a little unsure about NW, and LLYD, since we are already umming and ahhing LLOY ord shares, and want to spread risk etc. And I'm already a tiny bit nervous about banks, though I've heard that Lloyds is sticking to vanilla banking (i.e. not investment banking). Perhaps I'm wrong, still v. green in all this.

Anyway cutting to the chase, do we calculate our running yield at purchase, like this:

running yield = 100 / market * PREF_RATE

e.g. AVIVA8.375

100/141 * 8.375 = 5.94%

thanks Matt