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Bond funds sector review – volatile times for bonds

by Ozva Admin

Bond investors have had a rough ride over the last quarter, continuing the challenging ride year to date.

Inflation continues to rise, causing an uncomfortable cost of living reduction for many. The result has been rising interest rates and the UK is now expected to slip into recession at the end of 2022.

This article is not personal advice. If you’re not sure if an investment is right for you, ask for financial advice. If you choose to invest, the value of your investment will rise and fall, so you could get back less than you invested.

What’s the latest on interest rates and inflation in the UK?

In the UK, inflation hit 10.1% in the year to August and is expected to rise further.

This is significantly above the Bank of England’s target inflation rate of 2%. As a result, interest rates have risen, from 1% in May to 1.75% now. This is still low by historical standards, although more rate hikes are expected before the end of the year.

High inflation is often bad news for bonds, as the real yields achieved are lowered because most bonds pay fixed returns. Also, bond values ​​tend to fall as interest rates rise because people can earn more by keeping their cash in savings accounts. While prices are rising across the board, it is food and energy price increases that are hurting the most. A recent high-profile example is McDonalds raising the price of its cheeseburger from £0.99 to £1.19, an increase of 20%. The last time they increased the price of a cheeseburger was 14 years ago.

Energy prices have also increased significantly, which is expected to put more pressure on consumers when the energy price cap takes effect in October. Even with government support measures, this will result in less money for people to spend on goods and services.

Given that many of the drivers of these price increases are global in nature (inflation in the euro area is currently 8.9% and in the US it is 8.5%), it is difficult for the UK to United fight this alone.

What is happening in the bond market?

From early May to mid-June, bonds were generally sold off, largely as the US Federal Reserve (FED) raised interest rates at a faster pace than previously expected.

Since then, bonds have risen. With investors hopeful that while there will be more to come, the bulk of these rate hikes have already been implemented.

As a result, most bond values ​​at the end of July are only down a bit from where they were at the end of April, although the ride has been volatile.

The biggest concern now is the recession. A recession is when the economy shrinks in size for two consecutive quarters.

As the economy gets smaller, businesses often make less profit and the government receives less tax. This can make it difficult for the government to spend money on all of its priorities and, in most cases, leads to some tough decisions.

Recessions are defined slightly differently in the US, with some broader factors considered. But in line with the above, the US has already entered a technical recession after two quarters of negative growth during the first half of the year. The Fed hoped to cool inflation without causing a recession, however, this has historically proven to be an almost impossible task.

In the UK, the most recent comments from the Bank of England suggested that the UK will not only enter a recession at the end of 2022, but could last until late 2023 or early 2024.

This can have different effects on different types of bonds. Some government bonds, such as those issued by countries such as the UK and the US, are often more likely to hold or increase in value as they are considered “safer” investments. However, riskier corporate bonds could take a hit, as the chances of companies being unable to pay their debts are greater during a recession.

How have our fixed income Wealth Shortlist funds performed?

Our Wealth Shortlist bond selections have delivered mixed performance over the past year. Some have outperformed their peer group and others have underperformed. However, we would not expect them all to perform in the same way. If all your funds in one sector are doing well at the same time, they are probably investing in similar areas.

Investing in funds is not suitable for everyone. Investors should only invest if the fund’s objectives are aligned with their own and there is a specific need for the type of investment being made. Investors should understand the specific risks of a fund before investing and ensure that any new investment is part of a diversified portfolio.

For more details on each fund and its risks, please see the links to their fact sheets and key investor information below.

Past performance is not a guide to the future.

The best performing Wealth Shortlist fixed income fund over the past year was M&G Global Macro Bond with a return of -1.81%*.

Jim Leaviss and Eva Sun-Wai start with a “big picture” macroeconomic perspective. This includes forming an opinion about economic growth, interest rates and inflation worldwide. This helps them decide how much to invest in different areas of the bond market and different currencies.

Leaviss has historically used the flexibility provided by the fund to good effect to generate strong returns for investors. We believe that experience is essential for a manager of this type of fund and Leaviss is one of the UK’s most experienced fixed income fund managers.

The fund’s exposure to US dollars has helped returns over the past 12 months. Managers have positioned themselves on the defensive, due to concerns about inflation and interest rate hikes, and this has also helped keep losses below those of their peers. But the bonds they hold have still lost value.

MORE ABOUT M&G GLOBAL MACRO BOND, FEES INCLUDED

KEY INFORMATION FOR INVESTORS IN M&G GLOBAL MACRO BOND

The worst performing Wealth Shortlist fixed income fund over the past 12 months was the Legal & General All Stocks Gilt Index, returning -14.37%** over the period.

The fund offers an easy way to invest in UK government bonds of all maturities. It can help diversify a portfolio focused on stocks or other types of investment. Inflation and interest rate increases have caused the fund to lose money over the period. As it is a passive fund, the performance is not due to the decisions of the manager.

MORE ABOUT LEGAL AND GENERAL ALL STOCKS GILT INDEX INCLUDING FEES

LEGAL AND GENERAL ALL SHARES GILT INDEX KEY INVESTOR INFORMATION

Annual percentage growth
July 17th –

July 18
July 18 –

July 19
July 19 –

July 20th
July 20th –

July 21
July 21-

July 22
M&G Global Macro Bonus -1.16% 12.15% 5.96% -6.14% -1.81%
IA Global Mixed Bonus -0.53% 7.35% 2.40% 0.39% -7.56%

Past performance is not a guide to the future. Source: *Lipper IM as of 07/31/2022.

Annual percentage growth
July 17th –

July 18
July 18 –

July 19
July 19 –

July 20th
July 20th –

July 21
July 21-

July 22
Legal & General All Stocks Gilt Index 0.83% 6.70% 10.03% -4.39% -14.37%

Past performance is not a guide to the future. Source: **Lipper IM as of 07/31/2022.

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Our fund research is for investors who understand the risks of investing and that investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own and there is a specific need for the type of investment being made. Investors should understand the specific risks of a fund before investing and ensure that any new investment is part of a diversified portfolio.

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