Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.
- Co-manager Eric Holt is a seasoned bond investor with over three decades of investment experience
- The fund invests across the bond market, including in higher-risk unrated bonds
- The fund has performed well since its launch in 2003, outperforming its IA Strategic Bond peer group
- The fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential
How it fits in a portfolio
The Royal London Sterling Extra Yield Bond fund offers the potential to deliver a high income for investors, but its approach means it’s also higher risk. The fund could be used to diversify a bond portfolio, or a more adventurous shares portfolio seeking exposure to other asset classes. We think the fund could be more volatile than some other bond funds.
Manager
The fund is co-managed by the experienced Eric Holt and Rachid Semaoune. Holt joined Royal London in 1999 and his investment career stretches over three decades. He’s been manager of the fund since its launch in 2003 and also has responsibility for Royal London’s credit research process.
Semaoune began his investment career in 2001 at Gulf International Bank before later joining UBS Asset Management to manage investment grade bond portfolios. He joined Royal London from UBS in 2015.
Eric Holt and Rachid Semaoune also have the help of a team of analysts and other fund managers at Royal London. Both managers also run other fixed income strategies at Royal London.
Process
The managers look for opportunities across the credit market by investing in a combination of investment grade, sub-investment grade and unrated bonds (bonds without a credit rating) where they believe valuations are attractive. They don’t rely on credit ratings and consider if the reward on offer is sufficient for the risk of owning a bond. As of the end of April, 35% of the fund was invested in unrated bonds.
They tend to focus more on the prospects for individual bonds, rather than taking wider views on things like duration (a bond’s sensitivity to a change in interest rates). Holt and Semaoune therefore aim to add value for investors by investing in bonds others don’t fully understand that they think could go on to perform well in the future. They hold a wide range of bonds in the fund, so returns don’t rely on the performance of a single investment. Investments in high-yield bonds can increase risk.
Holt and Semaoune have been active in identifying new opportunities to add to the portfolio. Recent purchases include the newly issued bonds of UK energy business Enquest, the ‘BBB’ rated bonds of commercial property business Blackstone and Dutch bank ING group.
The managers think the uncertainty we’ve seen so far this year is set to continue in the coming months. They believe the war in Ukraine has intensified existing trends which leaves central banks in a difficult position in trying to decide the policy path from here. And in credit markets, should the situation in Ukraine deteriorate, the managers think we could see further widening in the spreads of investment grade and high yield bonds. They expect to maintain a focus on subordinated financial bonds, where they think valuations remain attractive.
Culture
We believe Royal London’s speciality is in managing fixed income portfolios. Their philosophy is that all well-diversified portfolios should include an element of income. They use a combination of top-down macroeconomic analysis and bottom-up security selection to manage their bond portfolios which has served them well over time.
The managers are rewarded based on the long term performance of their fund, so their interests are aligned with investors. We think their incentivisation structure is better than most and encourages good behaviour, but it isn’t as long term as some other groups.
ESG integration
The managers consider environmental, social and governance (ESG) factors in their analysis. This helps them identify potential risks that could affect the long-term viability of lending, increase costs to the business or result in future litigation.
All Royal London fund managers have access to ESG ratings and analysis produced by the firm’s central Responsible Investment team. The firm asks that all managers incorporate this into their investment decision making processes, but our meetings with Royal London fund managers suggest the quality of ESG integration is mixed.
The Responsible Investment team coordinates company engagement and engagement case studies can be found in the firm’s annual…
Read More: Royal London Sterling Extra Yield Bond: June 2022 update