Passive bond funds out of favour in Bestinvest's top funds list

Six passive bond funds dropped out of the list this year, including a number of iShares funds. 

The bond market has suffered in 2022 as a result of rising interest rates, triggered by high rates of inflation.

Some of the passive funds to fall off the list include iShares’ corporate bond (0-5 year) and index-linked gilt ETFs, as well as Standard & Poor’s 1-5 year gilt and 1-3 year US treasury bond ETFs.

Lindsell Train’s global equity fund was dropped from the list, after seeing significant underperformance in the past year.

The fund has lost 5.7 per cent in the year to July 31, compared with a 3.8 per cent return for MSCI’s world index. 

“After initial fears that higher inflation would force central banks to raise rates sooner than originally expected, there has been some stabilisation in government bonds and high-quality corporate bonds,” the report said. 

“Nevertheless, they remain vulnerable to further inflation shocks in the year ahead.”

Funds are selected on the basis of 10 “commandments”, that include managers who are not “constrained by hugging benchmarks”, have a clearly defined approach, personally invest in their own funds and who are willing to limit the size of their funds if this starts to hamper the way it is managed.

Funds that have entered the list this year include a number of income funds, including BlackRock’s UK income fund, Montanaro’s UK income fund, Redwheel’s UK equity income fund and SDCL’s energy efficiency income trust.

“Equity income remains a useful source of income for investors at a time when cash accounts and bonds pay almost nothing,” the report said.

sally.hickey@ft.com