2021: the year to invest in strategic bonds?

2020 turned out to be a decent year for fixed income. While the asset class fell along with equities in March and April, the fall was not as bad, and the bounce back has been strong.

At the height of the volatility, a number of Elite Rated managers said it was a good opportunity to invest in bonds and, over the past 12 months, each bond sector is in positive territory, with UK Gilt and Sterling Corporate Bond funds leading the way with average returns of 7.9% and 7.1% respectively*.

But what will 2021 hold in store?

As the world continues to recover from Covid-19, monetary policies should continue to support fixed income markets into 2021, but it will be important for investors not to get complacent.

“With valuations now back to levels seen at the start of 2020, it would seem we’ve come full circle over the course of the year, from expensive to cheap and back to expensive again,” commented Juliet Schooling Latter, research director at FundCalibre.

“In a world where many developed world government bonds have negative interest rates and many companies have stopped paying or have cut dividends, investment grade and high yield corporate bonds funds, as well as emerging market bond funds, are likely to remain popular as they offer a higher and more predictable income.

“However, the global economy is still in recession and second and third waves of the virus are weighing further on company balance sheets, so there is still the risk that some firms may default.

“Given the many unknowns on the horizon for 2021, good stock selection and active asset allocation will be as vital as ever – it may be that the flexibility of strategic bonds funds will be key to fixed income returns next year.”

Four strategic bond funds to consider

Invesco Monthly Income Plus

Invesco Monthly Income Plus has a flexible mandate and is designed to offer investors broad exposure to the UK fixed income market and provide a high level of income. Unlike many of its sector peers, it can also invest up to 20% in UK equities, using Invesco’s considerable equity income expertise.

Jupiter Strategic Bond

Jupiter Strategic Bond is a flexible ‘go-anywhere’ fund that allows the manager considerable freedom to exploit opportunities across global bond markets. He is quite cautious in his approach and emphasises limiting potential losses in tough markets. The aim is to achieve a moderate income, but with the prospect for growth.

M&G Optimal Income

M&G is perhaps the biggest name in the UK bond space, and M&G Optimal Income is its flagship offering. This ‘go-anywhere’ fund has a flexible mandate, which enables the manager to shift the interest rate exposure and to invest across the fixed income spectrum. The fund can, and often does, invest in some equities, and also derivatives.

TwentyFour Dynamic Bond

TwentyFour Dynamic Bond has a very flexible approach in order to take advantage of changes in market conditions. It may invest across the whole range of fixed interest assets. The income produced is usually one of the highest in the sector but will fluctuate as investments and market conditions change.