Finding the right bond fund has become more important following one of the toughest 12 months for fixed income in history.

A few options clearly stand out for their popularity with both managers and retail investors, however. Citywire’s dataset of the most popular funds held by wealth and multi-managers allows us to rank the bond strategies on UK discretionary portfolio hit lists. All but one of the top 10 have actually added assets in the past year, taking in almost £2bn collectively in new cash.

By a wide margin, the top choice – ranked by both the number of funds that hold it and by recent inflows – is the Rathbone Ethical Income fund, which added £534m, growing to £2.8bn. As seen below, the fund is favoured for its broad diversification and well-established ethical screening process. Another four funds in the top 10 also explicitly select on ESG criteria, illustrating how significant this now is in driving business.

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The most popular fixed income funds in model portfolios

^{Source: Citywire}

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The chart above shows how many model portfolios hold each of the 10 most widely owned bond funds, according to factsheet data.

Comment

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Richard Philbin

Chief investment officer for investment solutions, Hawksmoor

We have been long-term holders of the Rathbone Ethical Bond fund, and have been happy holders for a number of reasons. The ethical slant has meant that we have been able to create diversity compared to traditional bond funds. The screens they use from an ethical standpoint are both positive and negative as opposed to just positive or negative.

Working with Greenbank adds credence to their approach. The fund also has a high allocation to investment grade debt – at least 80% – which is likely to reduce some stock-specific risks. The portfolio is very broadly diversified across a number of issues [over 250], which is likely to reduce the risk of loss via default. The fund is very well diversified across a large number of industrial classifications too.

This makes it a core holding type investment. With a large exposure to financial debt, an increase in interest rates should improve the repayment quality of the debt they own. It is one of the first ethical bond players in the market and although the fund is now several billion in size, the performance track record has been impressive over the medium to long term.

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Victoria Hasler

Head of fund research, EQ Investors

We have invested in the Threadneedle Social Bond fund in our impact portfolios for some years now. The manager, Simon Bond, is an experienced and thoughtful investor and has a long-standing track record in investing to generate an attractive financial return and a tangible positive social impact.

The fund’s process ensures that only bonds whose proceeds are used to fund projects or companies contributing to a better world, particularly for underprivileged groups or locations, are considered, but we equally appreciate the robust financial analysis which the team undertake on all eligible investments.

When looking for bond funds more generally, we tend to prefer a defensive approach. We only ever invest in funds which meet a minimum sustainability level, including the exclusion of harmful activities and a high level of ESG integration. At present we favour lower duration funds as we believe these are likely to protect better in a rising interest rate environment.