In this article, we continue with the fixed interest theme, which is pertinent given where interest rates and inflation currently are in the UK.
There is an inverse relationship between the price of bonds and interest rates, with the strength of this relationship measured by duration. The higher the duration, the more sensitive the bond’s price is to interest rate movements. As such, in a falling interest rate environment, investors want a high duration (as prices are likely to rise more), whereas in a rising interest rate environment, investors seek as low duration as possible.
Within our model portfolios, we have been under-weight fixed interest for over a decade, preferring real assets such as infrastructure, as we felt the returns on offer were insufficient to justify the risks, i.e. rising interest rates. One fund we have been buying however, is the M&G Global Floating Rate High Yield fund. Floating rate bonds are unusual in that their coupons (or interest payments) are not fixed but vary, with correlation to the rate that banks lend and borrow money. As interest rates rise, this bank rate rises, thus floating rates provide protection against rising interest rates, which would otherwise be harmful to bond prices.
We first bought the M&G fund in July 2017 as we were of the opinion that interest rates would likely be higher in the future than they were then, so wanted an asset class that would benefit. Whilst it has not been plain sailing (it never is when investing in funds), over our holding period the fund has delivered what we expected it would. Since introducing it into our models, the M&G fund has returned 21.42% whilst the average global bond fund returned –0.25% and the average UK government bond fund returned –17.44%*; a sizeable difference.
James Tomlins has managed the M&G fund since it was launched in September 2014 and specialised in high yield markets since joining the group in 2011. Assessing his track record since managing funds, Tomlins has out-performed his respective peer group, returning 65.16% compared to 55.69%**.
Tomlins has outperformed his respective peer group, returning 65.16% compared to 55.69%**
*Source: Financial Express Analytics, Total Return, Bid to Bid, GBP£, 6th July 2017 to 18th September 2023
**Source: Financial Express Analytics, Total Return, Bid to Bid, GBP£, 1st December 2011 to 31st August 2023