There’s a worryingly large gap between the returns of the best and worst performing bond fund managers shows analysis by Bowmore Wealth Group. The worst performing decile of UK Government bond funds (gilts) lost 51.8% over the last three years*, compared to a 2.43% increase for the best performing decile of bond funds over the same period.
Even over the last year the difference in performance is stark with the top decile of bond funds returning 6.7% on average, while the bottom decile funds returned just 3.60%.
The recent UK Budget highlights the importance of choosing the right bond fund manager in delivering returns in a volatile bond market. Fears that the Government would have to increase sales of gilts saw bond prices tumble.
Bowmore’s research also shows that the wide spread of returns isn’t limited to gilt funds. In the last three years the top decile of global bond funds has lost 3.66% while the bottom have lost 15.51%.
Jonathan Webster-Smith, Chief Investment Officer at Bowmore Wealth Group says that the huge disparity in returns shows how important it is to carefully pick the right bond fund.
Adds Jonathan: “Investors are acutely aware of the need to pick the right equity fund manager but retail investors don’t make the same efforts choosing a bond fund manager.”
“Bond fund managers who took on too much risk as inflation started to increase have performed very badly. Many of the worst performing bond fund managers have not had experience of managing funds in a bear market for bonds.”
Many bond fund managers wrongfooted by length and severity of high inflation, leading to poor returns
Jonathan says some bond fund managers took on too much risk, by having too many long-dated bonds, in the runup to the rise in interest rates and the Liz Truss Budget.
Jonathan Webster-Smith: “Gilt funds were hit hard in 2022 as interest rates climbed to 5.25%. Some fund managers had invested too heavily in long-dated gilts with low coupons, which can fall heavily in value when interest rates rise. Higher-yield corporate debt was also a poor investment as rates rose. Funds that took major positions in these markets will have performed a lot worse than other funds”
Jonathan adds that the period that bond yields stayed high has been longer than many fund managers expected.
Experts insist that investors should ‘look under the bonnet’ of bond funds they’re looking to invest in
Jonathan Webster-Smith says that the wide gap between the best and worst performing bond funds shows how important it is for savers to understand what bonds are being held in the funds they invest in.
He says: “Being well-informed is vital for investors choosing a bond fund manager. These figures show that not all bond funds are created equal. Just because something is described as a gilt fund does not mean it necessarily has a great deal in common with another gilt fund.”
“Taking advice on what bond funds might fit your needs and risk profile is a sensible thing to consider.”
Gilt bond funds have seen a wide spread of returns, especially over the last three years
Global bond funds have also suffered from a disparity between the best and worst funds
*Year end Nov 11 2024
