Best Performing Investment Funds
Best Bond Funds 2022-23
Methodology
Wealth manager and head of research, Mike Murray, says the company’s approach to scrutinising and picking funds is driven by a combination of factors. These include looking at historical performance (while acknowledging this in itself is not necessarily a reliable guide to future returns), in addition to considering the skill and tenure of the fund manager in question.
Also important is how the manager’s view of the investment world is aligned with EU Wealth Management. Mr Mike Murray says: “In addition, we always insist on meeting managers to provide us with the opportunity to evaluate and fully understand their investment outlook and processes.”
Frequently Asked Questions (FAQs)
What is investing?
Investing is the process of using your money to generate a profitable return. Investing always carries with it the risk of loss. But so, too, does leaving your money under the bed where inflation can eat away at the value of your cash over time.
If you’re saving for the future – five years away at the very minimum – investing in stock market-based securities such as bonds, stocks and shares has the potential to produce greater rewards than cash on deposit and can also head off the corrosive effect of rising prices. At the time of writing, the latest figures show that consumer prices in the UK rose by 9.1% in the year to May 2022.
What are bonds?
Bonds make up one of the four main ‘asset classes’ associated with investing. The other three are cash, property, and stocks and shares.
Bonds are also referred to as ‘fixed-interest securities’. They are IOUs issued by governments and companies and are traded on the stock market. As an asset class, they sit between the relative safety of cash and higher risk securities such as stocks and shares.
The UK government issues bonds known as ‘gilts’, while their US government equivalents are called ‘Treasuries’. IOUs issued by businesses are called ‘corporate bonds’.
In each case, the institution issuing the bond does so in exchange for a loan. Gilts and Treasuries are government debt, while corporate bonds are company debt.
The term of the loan may last as little as a few months or, in the case of government bonds, can extend for several decades. Either way, in exchange for their cash, bondholders typically receive an interest payment while the outstanding loan is paid back when the bond matures.
How does a bond’s interest payment work?
The annual interest rate paid over the lifetime of the bond is known as ‘the coupon’ and is expressed as a percentage of the face value of the bond. The coupon is also referred to as the ‘nominal yield’.
For example, a conventional UK gilt might be phrased as ‘3% Treasury stock 2030’. The ‘3%’ refers to the coupon rate, in other words, how much interest an investor would receive each year (usually paid in six-monthly instalments). ‘Treasury stock’ means that you’re lending to the government, while ‘2030’ refers to the bond’s redemption date. In other words, when bond holders receive back their original investment.
The size of the interest payment typically reflects the relative security of the IOU in question. The greater the coupon, the riskier the bond.
How are bonds rated?
Global independent ratings agencies, such as Standard & Poor’s, Moody’s and Fitch Ratings, provide credit risk ratings for both government-backed and corporate bonds. Credit risk shows how likely a borrower (a bond’s issuer) is to default on their obligations to repay a loan.
The rating ascribed to a particular security can be used to determine whether it is an investment or speculative opportunity. Higher-rated securities begin with AAA (the highest), followed by AA and A and are regarded as ‘investment grade’. Lower rated securities (BB or lower) are thought of as being more speculative.
It is generally accepted that AAA and AA rated securities have a default risk of less than 1%. The risk increases as ratings descend through the alphabet.
Why invest in bonds?
As an asset class, fixed income has traditionally been portrayed as the boring cousin to stocks and shares. Over the past year, however, this has been anything but the case with the bond markets suffering a severe jolt to the system thanks to the wider economic environment.
The main culprit has been rising inflation, coupled with central banks’ willingness to tackle rising prices by hiking interest rates. Inflation is the biggest threat to bonds because, as prices rise, they erode the value of the fixed income you receive from a government or corporate IOU.
Earlier this month (June 2022), fund manager Schroders acknowledged that the past year had resulted in an “extraordinary time for bond markets”. But it added that there are three reasons why bonds have now become an attractive investment:
- attractive valuations offering appealing ‘total return’ potential.
- diversification as part of a broader investment portfolio.
- evidence that slower global growth will lead to some anticipated interest rate hikes not being realised.
What is an investment fund?
Investment funds allow you to diversify your money via a portfolio of assets – such as a basket of bonds – in which a fund invests.
Contributions are pooled from investors, with the proceeds managed by professionals according to certain investment guidelines (such as maximum limits on certain types of holding) and with each fund having a particular target. For example, to achieve long-term capital appreciation and income growth.
A bond fund is a version of an investment fund where fixed interest securities make up the majority of the assets held within the portfolio.
There are different types of investment fund, including: Open Ended Investment Company (OEIC); Investment Company with Variable Capital (ICVC), Société d’Investissement à Capital Variable (SICAV), etc.
Each name refers to the way a fund is put together and how it works from day to day. The overall idea of pooling money from the contributions of multiple investors holds true for each type.
How do I invest in bond funds?
There are several ways to start investing, including, opening an investment account, trading via a platform, choosing a robo-adviser, or delegating your investments to either a wealth manager or financial adviser. Find out more here about your investing options.
How much do bond funds cost?
The bond funds mentioned above include the management fee. This provides an indication of the fund’s annual running costs.
The management charge is made up of a fund manager’s fees, as well as administration, marketing and regulation costs. The idea is to produce a standardised method of comparing the costs of funds.
For example, a £1,000 investment in a fund with a management fee of 1% costs £10 per annum. Additional administrative/dealing charges may also apply depending on how the fund was bought – direct from the provider, say, or via an investing platform.
How do I invest tax efficiently?
Individual savings accounts UK (ISAs) are a form of financial wrapper that offer a tax-free way to save and invest. A stocks and share ISA is a tax-efficient product that allows you to gain exposure to the stock market.
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