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What is a corporate bond fund?

Using lower risk assets to provide returns. Investors who want to generate returns with lower risk can consider investing in a corporate bond fund. This investment product pools investors’ monies into a single portfolio and invests in a broad range of bonds that are issued by companies. A portfolio of corporate bonds might be difficult to construct if investing directly so using a fund is an effective way to diversify exposure and reduce risks.
Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

What are corporate bonds?

A corporate bond traded on financial markets is an IOU (‘I Owe You’) issued by a company. What is a bond. They are designed to deliver regular income and normally return the amount borrowed after a fixed term of say five, 10 or even 30 years. Bondholders are given priority over shareholders so a portfolio of them tends to be more stable than equities, for example, especially if the bonds are issued by financially strong companies.

The risk levels associated with a corporate bond depend upon the creditworthiness of the issuer. As such, corporate bonds are generally regarded as being higher risk, for example, than bonds issued by the UK or US governments. Higher rates of interest are usually paid, however, to compensate for this higher risk.

Bonds offer a vast investment choice. The bond market is much larger than that of equities and is worldwide. This choice enhances the ability to counter risks through effective diversification.

Corporate bonds are not listed like shares on a public market. Instead, they are traded between institutions in an ‘over the counter’ market.

The benefits of using funds

If you do not have the capacity to oversee your own investment portfolio, you can delegate this to a professional manager by investing in a fund. Even when investing a modest sum, you will obtain far more exposure to financial assets than you can by investing directly in bonds. Moreover, funds allow you access to a number of geographical markets and industry sectors across the globe.    

Investing in funds will usually involve taking on a certain degree of risk. Learn more about understanding your risk profile here.

Funds offer tax benefits, too, as they transact investment assets free of capital gains tax (CGT). As this is not typically the case if you manage your own portfolio, we therefore suggest that you consult a professional adviser about the tax implications of your investments.

The Liontrust Sustainable Future (SF) Corporate Bond Fund

The Liontrust SF Corporate Bond Fund is managed by Kenny Watson, Aitken Ross and Jack Willis, who have more than 45 years of combined investment experience in managing fixed income. They joined Liontrust as part of the acquisition of Alliance Trust Investments (ATI) in April 2017.

The aim of the Fund is to deliver income with capital growth over the long term (five years or more) through using the Sustainable Future investment process. At least 80% of the Fund is invested in investment grade corporate bonds that are sterling-denominated or hedged back to sterling. The Fund can also invest in government bonds and other fixed income securities. The majority of the Fund is invested in UK corporate bonds.

The Sustainable Future investment process

The fund managers aim to produce an income yield, with the prospect of some capital growth, by investing predominantly in corporate bonds and by actively managing the interest rate exposure.

Macroeconomic analysis is used to determine the managers’ top-down view of the world and this helps to shape all aspects of portfolio construction and appetite for risk. After this, the managers aim to focus on high-quality issuers and believe this can reduce bond-specific risk. Their assessment of quality is a distinctive part of their process, in which they combine traditional credit analysis with a detailed sustainability assessment based on their proprietary model.

The fund managers assess individual bonds for whether they believe the bonds offer attractive long-term returns and for absolute and relative valuations. There is no point in investing in a bond merely because it is cheap relative to others in the sector if the fund managers believe the total returns are not attractive to the end investor.

The fund managers seek the best value bonds issued by high-quality issuers across the capital structure, along the maturity curve and that have been issued in the primary credit markets (UK, US and Europe).

Selecting the best manager is a challenge

The funds offered by Liontrust are actively managed, meaning that you have a professional determining which assets to invest in at any given time. When selecting a corporate bond fund, we recommend you seek the advice of a financial adviser.