The best and worst corporate bond funds of 2011

Corporate bonds, which allow investors to lend money to businesses at a fixed interest rate, are proving to be an attractive alternative to government debt.

As turmoil in the eurozone has seen UK government bonds, or gilts and US bonds, or treasuries, gain a safe haven status to yield all-time lows, investors are looking to other investments for greater returns.

Many bond managers have said they are looking to higher value, corporate bonds, where there is a lot of potential value in businesses with strong balance sheets and better rates of return than those bonds issued by governments.

Corporate bond funds were one of the best performing sectors in 2011, with an average total return of 5.1%.

Yet despite the sector’s gains the average portfolio failed to beat the Markit iBoxx Sterling Corporate benchmark which rose 5.4%. In such a tough market we look at which funds managed to beat the index.  

This is a part of a series looking the best performing funds of 2011. Earlier this week we covered UK All-Share funds, US portfolios and UK smaller Companies funds.

Best performers of 2011

Last year 49%, or 44 out of 92 funds, beat the benchmark to return more than 5.4%.

Henderson’s Long Dated Credit fund was the best performer in 2011, returning 13.5%. The fund is managed by Citywire A-rated manager Philip Payne and has top holdings in utilities and financials, with bonds from German bank KFW, Pfizer, Network Rail and Lloyds TSB.

In second place comes the Baillie Gifford Investment Grade Long Bond fund, giving returns of 12.8%. Citywire AAA-rated manager Robert Baltzer oversees the portfolio, with key holdings in KFW, the European Investment Bank and Longstone Finance.

Top 10 corporate bond funds in 2011

Click on the links in the table to find out more about the funds and their managers.

Other high achievers in 2011 include Fidelity’s Institutional UK Smaller Companies fund overseen by Citywire AAA-rated manager Ian Fishwick; Newton’s Long Corporate Bond; AXA Sterling Corporate fund; and Schroder’s Institutional Long Date Corporate bond fund.

Taking a three year view

Looking back at 2009 to 2011 can give a better indication of how the sector has performed and which funds stand out.

In that time corporate bond funds returned an average of 33.7%, outperforming the Markit iBoxx Sterling Corporates index at 31.8%.

In the same period almost half, or 38 out of 81 funds, beat the benchmark.

The top performing fund since 2009 is Old Mutual’s Corporate Bond fund with returns of 63%. It is overseen by Christine Johnson and has key holdings in KFW, Insight ILF and Highbury Finance. 

Second in the running once again is Baillie Gifford’s Investment Grade Long Bond, giving returns of 12.8% making it a top performer in 2011 and over a three year period.

Holding third place is Henderson’s Sterling Bond co-managed by Citywire A-rated manager Philip Payne and AAA-rated manager Stephen Thariyan. The fund has given returns of 59.2%, with key holdings in some well-known brand names like Wal-Mart and Johnson & Johnson.

Top 10 corporate bond funds in 2009-2011

Click on the links in the table to find out more about the funds and their managers.

Some of the other top performers in the last three years include the UBS Corporate Bond UK Plus fund; Ignis Corporate Bond run by Citywire AA-rated manager Chris Bowie; Citywire Selection star-pick M&G Strategic Corporate bond fund; Rathbones Ethical bond fund and Fidelity’s Institutional UK Smaller Companies fund makes another appearance.

Struggling at the bottom

However most funds failed to beat the benchmark, with some seriously struggling to make gains above the rate of inflation.

The poorest performing fund over the past three years is the M&G High interest fund run by Ben Lord. It only returned an average of 6.9% in the past three years and has key holdings in Northern Trust, US Treasuries and German bank KFW

Another poor performer was Standard Life’s Invest AAA Income fund run by Andrew Sutherland with average returns of 14.6%. Its biggest holdings are in the European Investment Bank and KFW.

Sutherland manages five bond funds for Standard Life and three of them are among the worst performing funds over the last three years.

Bottom 10 corporate bond funds in 2009-2011

Click on the links in the table to find out more about the funds and their managers.

Other poor performers in since 2009 include Standard Life’s Invest UK Ethical Corporate Bond; the HSBC Corporate Bonds; Schroder Corporate Bond; and GLG Core Plus Sterling Bond.

Using Citywire data

All ratings are carried out according to data on the Citywire Money website.

For this analysis, we have looked at the 92 unit trusts (or open-ended investment companies as some of them are called) operating in the corporate bond sector. This excludes investment trusts and exchange traded funds and unit trusts investing in smaller company shares.

To do this we have looked at the one and three-year returns of UK corporate bond funds available on our website. This performance data comes from a specialist provider called Lipper, which is part of the Thomson Reuters group. You can see the figures for yourself by following the links in this article. 

Our exclusive fund manager ratings are based on our analysis of the Lipper fund performance data. You can find out more about how we rate fund managers in our explainer guide.