Sajiv Vaid, co-manager of Fidelity MoneyBuilder Income, knows that his investors want his fund to do several things all at once.
The traditional role of a bond fund has been to add some stabilising ballast to portfolios, winning when equities lose and smoothing out returns. Yet, in common with many bond funds, MoneyBuilder Income has spent much of the period since the financial crisis matching, if not exceeding, the returns from riskier shares.
Rather than moving in the opposite direction, bond returns have been synchronised with equity returns for substantial periods, as central bank action to kick-start growth has benefit assets across the board.
The unusual conditions, however, have not changed MoneyBuilder Income’s mission statement. As Vaid explained: “What we’re aiming to deliver is a good level of income, moderate volatility and a low level of correlation with equities.
“It is still important to step back. Returns in general are likely to be lower, so why should you have bonds? That’s a really sensible question to ask but, over time, what we’ve seen is that bonds act as a good diversifier.
“Over 20 years (of the fund’s) history the correlation with equities has been negative, however there are periods - including the 2013 taper tantrum, Brexit and the Trump rally -when correlation increases and can be move to become positive. But those are only short-lived.
“I think the role of fixed income, as part of a diversified portfolio, is absolutely paramount.”
This adherence to the idea of bonds as diversifiers leads MoneyBuilder Income to favour high-quality investment grade debt, ahead of high-yield debt that often perform more like shares. This, Vaid said, provides reassurance to investors buying the fund for income.
“The key thing for investors to know is that 95% of income produced by the fund is delivered by investment grade bonds. We cap the high yield exposure at 5% so investors know exactly what they’re going to get.”
Alongside co-manager Ian Speadbury, Vaid constructs the fund by combining a top-down view of economic factors such as the outlook for interest rates and inflation, along with bottom-up work on the safety of bonds from governments and companies.
“We use our experience”, he said, adding that they are aided by the large credit research team on hand within Fidelity. Recently, the fund, which invests globally, has been skewed towards short-dated bonds, which mitigates the risk of rising inflation that harms the prospects of bonds maturity far into the future.
What about the concern that bonds, which have been in a multi-decade bull market, must now face a period out of favour as interest rates rise and bond-buying by central banks is reversed? Vaid says much will depend on inflation, but that this remains broadly on-target meaning tightening monetary policy will be gradual.
“I don’t think we would have believed 10 years ago that we would still be talking about central banks with still billions of assets on their balance sheets from quantitative easing, and I think the signs are that those balance sheets will only be reduced very slowly. The balance sheet globally will reduce, but it’s clear central banks are going to be involved in markets for some time to come.”
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This fund invests in overseas markets and so the value of investments can be affected by changes in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the Fund investing in them. Due to the greater possibility of default an investment in a corporate bond is generally less secure than an investment in government bonds. This fund may use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.