“You won’t see bumper returns with a bond fund,” says Emma Simon in The Daily Telegraph, “but you should get an income stream” – and the risk to your capital is lower than with an equity fund. With yields on investment grade bonds – issued by blue-chip firms – now touching 7%, they are at their most attractive in years.
Up 3.4% since March, M&G Optimal Income is one bond fund worth a look, says Mark Dampier of Hargreaves Lansdown in The Independent. For a start, unlike many other bond funds, its manager Richard Woolnough has the flexibility of switching between different kinds of bonds, depending on what he regards as being the most attractive at any one time.
That means he’s one of the few bond managers right now steering clear of bank debt, despite the attractive 10% yields on offer. This is because, as Woolnough tells Citywire, “banks are far from over the worst and they may still face dire financial trouble”. Even Northern Rock offers a Tier 1 bond, but were it to default on it – “a distinct possibility,” says Dampier – Tier 1 bonds across the market would be negatively affected.
Gilts are another, even safer option of course, but corporate bonds should outperform them, Woolnough tells Investment Adviser. He points out that before the credit crunch, investment grade corporate bonds returned 70 basis points over gilts. That gap has since widened to over 250bps more than gilts, with an average return of 7.1%.
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M&G Optimal Income Fund’s top ten holdings
| Name of holding | % of assets |
| Treasury 8 3/4% STK 2017 | 3.40 |
| France Telecom 7.5% BDS 14/3/11 | 2.10 |
| Treasury 4 3/4% LN STK 2010 | 1.60 |
| BT 7.5% NTS 7/12/16 | 1.40 |
| National Grid 5.5% INST 24/07/13 | 1.30 |
| Deutsche Telekom 7.125% 2012 | 1.20 |
| Transneft 5.381% 2012 | 1.10 |
| Allied Domecq Fin SVC 6.625% NTS 12 | 1.10 |
| Xstrt FN C 7.375% GTD NTS 27/05/GBP | 1.10 |
| Schering Plough 5.375% 01/10/2014 | 1.00 |