Fidelity launches first ever passive fixed income funds. What are they

Asset manager Fidelity International has expanded its passive fund range with the launch of a new index UK Government bond and sterling corporate bond fund.

The new additions are the first fixed income funds to be launched in the group’s index range which was established in 1996 but has, until now, only ever included funds investing in shares.

The Fidelity Index UK Gilt fund will track the FTSE Actuaries UK Gilts index, while the Fidelity Index Sterling Corporate Bond Fund is benchmarked to the iBoxx GBP Liquid Corporates Large Cap index. 

Fidelity has launched a new index UK Government bond and sterling corporate bond fund

Fidelity has launched a new index UK Government bond and sterling corporate bond fund

Fidelity has launched a new index UK Government bond and sterling corporate bond fund

As traditionally low-cost options compared to their active peers, the latest passive offerings have ongoing charge figure of around 0.10 per cent.

But what exactly are they, what do they do and why should you consider them as a part of your investment portfolio?  

What is an index fund? 

An index fund is a type of mutual fund or exchange-traded fund with a portfolio made up of stocks matching or very close to financial market indices such as the FTSE 100 or S&P 500.

They are not actively run by a fund manager but instead track their benchmark index regardless of the state of the market. For this reason, portfolio turnover and costs are often lower than their active counterparts. 

Instead of holding stocks like an equity fund, a fixed income fund invests in bonds which are loans made by an investor to a borrower – borrowers are typically corporate or governmental. 

Fixed income can offer a steady stream of income with less risk than stocks because bonds are generally less sensitive to macroeconomic risks such as market downturns and political events.  

An index fixed income fund therefore invests in bonds that match or track a bond market index such as the Bank of America Merrill Lynch Global Government Bond or the Bloomberg Barclays Global Aggregate Bond indices.  

Fidelity OEIC Index fund range 
Fund  Ongoing charge figure (%) 
Fidelity Index UK Gilt fund (NEW) 0.10
Fidelity Index Sterling Corporate Bond fund (NEW) 0.12 
Fidelity Index UK fund  0.06
Fidelity Index US fund  0.06
Fidelity Index Europe ex UK fund  0.10 
Fidelity Index Japan fund  0.10 
Fidelity Index World fund  0.12 
Fidelity Index Pacific ex Japan fund  0.13 
Fidelity Index Emerging Markets fund  0.20 
Source: Fidelity International at at 26 August 2020 

What do the new Fidelity funds do? 

Fidelity said it has launched its newest funds to provide investors with a low-cost passive fixed income solution. 

There is an ongoing charge figure of 0.10 per cent for the UK Gilt fund and 0.12 per cent for the Sterling Corporate Bond fund.

The latter, which invests in UK Government bonds (also known as Gilts), will track the FTSE Actuaries UK Gilts index, a widely-used market index for investors looking to measure the performance of the UK Gilt market. 

According to FE fundinfo, since January, the index has returned 6.46 per cent. 

Meanwhile the Fidelity Index Sterling Corporate Bond fund will track the iBoxx GBP Liquid Corporates Large Cap index, which provides benchmarks in the sterling corporate bond market. It is up 4.22 per cent year to date.

John Clougherty, head of wholesale at Fidelity International, said there is currently a total of £66.4billion invested in passive fixed income retail funds in the UK market, and he only expects this to increase.

He added: ‘Extending our passive investment capability to include our first fixed income funds reaffirms our commitment to deliver greater choice for clients, as investors look for efficient, low cost access to the asset class.

While active management remains at the heart of our business, we know that investors want choice and value when it comes to investing, whether that’s through an active fund, a tracker or both.’ 

What do the experts think?

Morningstar’s Jose Garcia Zarate said Fidelity failed to capitalise on the growing appetite for low-cost indexed solutions over the past decade, that is, until now. 

He said: ‘The launch of these two bond index funds signals that they may now be ready to start offering their clients passive solutions across multiple asset classes to better meet their asset allocation needs.

‘The two new bond index funds are as plain vanilla as one can get, but these are also the two core bond market exposures that UK investors would want to have in their portfolios. 

Interactive Investor's Dilov said the double fund launch from Fidelity is 'punchy'

Interactive Investor's Dilov said the double fund launch from Fidelity is 'punchy'

Interactive Investor’s Dilov said the double fund launch from Fidelity is ‘punchy’

‘The challenge for Fidelity is that they’re clearly late to the party and this is a market where other competitors such as iShares, Vanguard and L&G, have a very solid presence in the UK market.’  

Garcia Zarate said there is ‘nothing noteworthy’ about the new funds and that even the price is in line with that of other long-established competitors.

However, Teodor Dilov, fund analyst at Interactive Investor, said this is a ‘punchy’ launch from Fidelity from a pricing perspective.

‘It’s not the first time we’ve seen a global giant look to take some of the cake from the mighty Vanguard, with some subtle undercutting,’ he said. 

‘For example, last year we saw BlackRock launch a portfolio range to rival the extremely popular Vanguard Lifestrategy range. It certainly looks cheap, but we will be keeping an open mind on this launch until it has built up a performance track record.’

Commenting on the specific strategies, Darius McDermott, of Chelsea Financial Services, said gilts are backed by the UK Government which has never failed to repay a gilt so is a safe option for investors.

‘But the yield you get is very low,’ he added. ‘And if and when interest rates go up you would expect to lose capital due to interest rate sensitivity (duration) on the index. So interest will be paid on the gilt index but you may lose money.

‘Fidelity already has a range of index funds that track various equity indices and this is a natural extension of their range for those looking for lost cost investments.’  

However, Ben Yearsley of Shore Financial Planning, said he isn’t a fan of index investment in the fixed interest space.   

He said: ‘I struggle to see why any one would buy gilts at the moment with no return really in any part of the curve. 

‘If you want gilts, I would buy an individual gilt as you know with certainty what the outcome will be if you hold to maturity.’

On corporate bond funds, especially given where interest rates stand currently, he believes it is more important to avoid the losers than buy the winners.

He added: ‘The winners might give you a small uptick but the losers could lose you 20, 30, even 40 per cent if a company goes bust.’   

What are the alternatives?     

Both McDermott and Yearsley prefer active funds for those looking for fixed income exposure, and believe though they do come with extra cost, it is not excessive and they would prefer to utilise the skill of a fund manager to provide better returns.

Ben Yearsley likes AXA's Sterling Buy and Maintain Credit fund

Ben Yearsley likes AXA's Sterling Buy and Maintain Credit fund

Ben Yearsley likes AXA’s Sterling Buy and Maintain Credit fund

McDermott likes the Artemis Corporate Bond fund, run by Steve Snowdon, with an OCF of 0.40 per cent. He said it has delivered strong returns over the last 20 years. Year-to-date it has returned 7.92 per cent.

He also recommends the Twenty Four Corporate Bond fund, managed by Chris Bowie who boasts ‘a very good track record’. Since January the fund is up 3.71 per cent and has an ongoing charge figure of 0.54 per cent. 

Yearsley prefers AXA’s Sterling Buy and Maintain Credit fund which has a very low OFC of 0.15 per cent despite being actively managed. It has returned 3.77 per cent since the start of 2020. 

Meanwhile, Joe Healy of The Share Centre, said he likes the L&G All Stocks Gilt Index fund which currently has an OCF of 0.15 per cent and aims to track the FTSE Actuaries British Government All Stock index. 

‘Over the last year the index has marginally outperformed its benchmark,’ he said.

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