Schroder Sterling Corporate Bond Z Acc
Why is this fund on our radar?
This fund might suit investors looking for a source of income with the potential for some capital growth too. The income could be expected to be higher than that available on cash accounts or government bonds over the long run, because the fund lends to businesses, which typically pay more to borrow than the UK government. However, this might not always be the case. The fund focusses on those companies with higher credit ratings, which means they are expected to have a very low chance of defaulting on their debt. The managers may be able to achieve a bit of capital growth too if they can successfully trade bonds, buying them when they are cheap and the yields high, before selling them when the yields are low and the prices high. It made it onto our list because of is consistent good performance versus an index representing the market in which it invests. The fund was not particularly active, but did generate outperformance and did so steadily over multiple periods rather than in a lumpy fashion.
Skip to Our VerdictPerformance
Income will often make up the majority of the return from this fund. However, an important factor to consider is the sensitivity to interest rates. When interest rates fall, bond prices rise, and vice versa . A corporate bond fund manager can position a portfolio in different parts of the asset class to moderate these effects, but can’t escape them. The chart below shows the last five completed calendar years (although we note the current management team only took over in April 2021). The significant losses in 2022 reflect a drastic series of interest rate increases, of a pace rarely seen in history. If rates come down over the coming years, as most analysts expect, then this should bring capital growth to the portfolio. The chart also includes a very strong year in 2020, which was driven by interest rates being cut to near zero in an emergency policy to cope with the pandemic. Neither are likely to be typical years, but they do highlight that investors buying for income need to be patient and accept that prices will swing from year to year. It’s worth stressing that over three and five year periods, this fund has outperformed its benchmark and delivered positive returns, despite the sharp losses in 2022.
Annual Performance
Source: Schroders
Past performance is not a reliable indicator of future results
Most effective has been the sector allocation when it comes to generating outperformance, responsible for more outperformance than any other factor in each of the last five years. This reflects the punchy active bets taken by the managers as well as their more measured approach to individual position sizing. Positioning in debt of the right currency has consistently added to returns, while positioning around interest rate movements has been more up and down.
The fund pays quarterly dividends. Income rose for four years until 2024 when it dipped slightly. Income return will depend on the yields available in the fixed income market. It is much steadier than the total return shown in the chart above.
Portfolio
The fund is managed by Daniel Pearson, credit portfolio manager, and Julien Houdain, head of global unconstrained fixed income. It falls under Julien’s team, and so the managers have its extensive human, quantitative and logistical resources to draw on. While the 40+ credit analysts are vital, as they analyse the individual bonds, the team’s expertise in analysing all the macroeconomic inputs into fixed income, such as growth, inflation and currency, are all useful when it comes to Daniel and Julien’s active positioning within their market.
That said, the core of this proposition is the sector and stock selection within UK and European investment grade corporate debt. Daniel and Julien can invest up to 20% into higher yielding, typically riskier High Yield or emerging market debt, and can invest up to 20% into typically lower risk, lower yielding government debt. They can adjust their interest rate sensitivity, but only within limits. While the benchmark is a sterling issuer index, they invest in European and to a lesser extent US corporate debt too.
The process is systematic and based heavily on data analysis in order to reduce bias and control risk. The teams will work out their views on various likely economic scenarios, and rate the probability of them happening. This influences how they construct the portfolio, with the managers ensuring they are not fully committed to one outcome and therefore exposed if their central scenario is wrong. The portfolio typically looks very different from the benchmark when it comes to sector allocation, and this is a key way in which the team have managed to add value over recent years.
sector Allocation
Source: Schroders
Our Verdict
We think this fund could appeal to those who want an income with the possibility for some capital growth over the long run, and who can accept volatility in the price of the fund. It will tend to do better when rates are high but coming down and when the economy is improving. Schroders have deep resources to bring to bear on this fund. Their large team allows them to cover a full range of borrowers, while they have the means to analyse multiple regional economies and consider the various critical economic inputs into bond pricing.
The fund has the typical sensitivity to interest rates of fixed income strategies, which means it might perform well or at least less badly when equity markets fall. However, at the time of writing, the compensation for taking the risk of lending to high quality companies is not particularly high, which means there is not a large extra yield being offered over government bonds, which is a risk to bear in mind over the short to medium term. The income can be expected to vary across the economic cycle. At the time of writing, yields on offer in this market are high by historic standards, thanks to interest rates being high, so there is some potential for the dividends to fall over the next year or two.
Key Risks
- Sensitivity to interest rates will see prices fall when rates rise
- The compensation for taking credit spreads is not high in late 2025
- Income may vary from year to year
