FIXED INCOME

Time to rethink fixed income?

When it comes to income investing, the last few years have been challenging in the UK, with domestic assets caught out by soaring inflation and economic slowdown. Those factors, plus central banks in rate hiking mode, have created a particularly difficult backdrop for bonds, with markets experiencing one of the most turbulent periods in a generation.

In this environment, we believe a rethink is needed around income investing, particularly fixed income, to help ensure a smoother journey. Bond funds that seek to deliver consistently high income under different market conditions could be key to meeting client goals. We are therefore making the Capital Group Global High Income Opportunities (GHIO) strategy available to UK investors for the first time through an open-ended investment company.1

One potential silver lining from recent bond weakness is that the yields these markets now offer are some of the highest for many years; this has led many commentators to claim that ‘income’ is finally back in fixed income.

A look back at the history of global bond markets shows that investing when yields are at current levels, around 3.7% for the Bloomberg Global Aggregate Index and 9% for high yield corporates2, has led to strong results over the following years3. If we start to see inflation coming down in the coming months, we could expect central bank hiking to peak. Given current yield levels, that could offer a fertile environment for fixed income.

For UK investors, however, yields on sterling investment grade credit are currently still well below inflation, highlighting the importance of seeking more diversified sources of income.

 

High inflation requires high income solutions

Yield on domestic UK assets compared with UK CPI

Past results are not a guarantee of future results.

Data for UK equities, UK REITs (real estate investment trusts) and sterling bonds covers period from 31 December 2019 to 31 December 2022. Inflation is based on UK Consumer Price Index (CPI) (all items) annual percentage change and covers period from 15 December 2019 to 15 November 2022. UK equities represented by dividend yield of FTSE All Share Index, Sterling Corporate bonds represented by yield-to-worst of ICE BofA Sterling Corporate Bond Index, UK REITs represented by dividend yield of FTSE UK REIT Index. Sources: Refinitiv, Capital Group

Launched into the European market back in 1999, the GHIO strategy has a long and successful track record of providing high income, with a 7%4 average over the last 10 years, a period in which much of the bond market was offering low or even negative yields. Key to this is the strategy’s flexible and diverse approach, investing across countries and different parts of the bond market to find the most attractive opportunities. The two main areas of focus are high yield and emerging market debt, both traditionally among the higher yielding parts of the bond universe.

Beyond higher income, these markets also provide diversification for UK investors: there are 25 developed high yield markets, for example, and more than 80 countries with emerging sovereign and corporate bond markets.

All Capital Group funds are anchored on fundamental research and we feel that in volatile markets, the ability to distinguish between credits and identify winners and losers becomes increasingly important. This fundamental, bottom-up analysis is the cornerstone of the strategy’s long-term success. Capital Group’s broader fixed income platform is backed by more than 200 fixed income professionals managing £398 billion of assets5. 

GHIO is run by a team of seasoned portfolio managers, each of whom has been investing in financial markets for at least a quarter of a century. This means they have seen a variety of conditions. All four of the portfolio managers are specialists in their field, able to bring their expertise to bear through our distinctive multiple-manager approach, The Capital SystemTM.

Supporting the managers are a team of high yield and emerging market analysts; through their work, they can identify risks and opportunities to ensure investments made are likely to provide consistent and higher income.

UK investors can now benefit from this expertise through the launch of Capital Group UK - Global High Income Opportunities, an open-ended investment company.

 

High income with diversification on multiple levels

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1. The Luxembourg SICAV Capital Group Global High Income Opportunities (LUX) (inception: 7 May 1999) is referenced as a representative account for the strategy. This is intended to illustrate our experience and capability in managing this strategy over the long term. UK investors can now directly access this experience following the launch of Capital Group UK – Global High Income Opportunities on 18 January 2023.

2. As at 31 December 2022 in USD terms. High yield corporates represented by Bloomberg Global High Yield Index. Sources: Capital Group, Bloomberg

3. Data from Capital Group and Bloomberg (as at 31 December 2022) shows the average five-year forward returns going back to 2001 are 5.8% when the Bloomberg Global Aggregate Index is yielding around 3.7%, and 8.1% when the Bloomberg Global Corporate High Yield Index is yielding 9%.

4. Based on a representative account for the strategy. 10-year average annual income yield is to 31 December 2022. Dividend yields distributed by share classes will differ dependent on type and how investors choose to pay management fees and expenses.

5. Assets under management are preliminary for 30 September 2022. Fixed income assets are managed by Capital Fixed Income Investors. 

 

Risk factors you should consider before investing:

FOR PROFESSIONAL INVESTORS ONLY

Financial promotion

All data as at 31 December 2022 and attributed to Capital Group, unless otherwise specified.

This material, issued by Capital International Management Company Sàrl (“CIMC”), 37A avenue J.F. Kennedy, L-1855 Luxembourg, is distributed for information purposes only. CIMC is regulated by the Commission de Surveillance du Secteur Financier (“CSSF” – Financial Regulator of Luxembourg) and manages the fund(s), which is a (are) sub-fund(s) of Capital International Fund (CIF), organised as an investment company with variable capital (SICAV) under the laws of the Grand Duchy of Luxembourg and authorised by the CSSF as a UCITS. All information is as at the date indicated unless otherwise stated and subject to change.

Facilities to investors (tasks according to Article 92 of the Directive 2019/1160, points b) to f)) are available at www.eifs.lu/CapitalGroup

The list of countries where the Fund is registered for distribution can be obtained at all times from CIMC or online at www.capitalgroup.com/europe

For the OEIC fund: This material is issued by Capital Group UK Management Company Limited ("CGUKMC"), Registered office 40 Grosvenor Place, London SW1X 7GG, authorised and regulated by the Financial Conduct Authority. CGUKMC manages the fund(s), which is a (are) sub-fund(s) of Capital Group Fund (CGF), established as a UK UCITS Scheme and structured as an umbrella company (under the OEIC Regulations).

You may be entitled to compensation from the Financial Services Compensation Scheme (the ‘Scheme’). Your entitlement to compensation depends on the type of business and the circumstances of the claim.

Other important information

The information in relation to the index is provided for context and illustration only. The fund is actively managed. It is not managed in reference to a benchmark.

Investors acquire shares of the fund, not the underlying assets.

The fund(s) is (are) offered only by Prospectus, together with the UCITS Key Investor Information Document. These documents, together with the latest Annual and Semi-Annual Reports and any documents relevant to local legislation, contain more complete information about the fund(s), including relevant risks, charges and expenses, and should be read carefully before investing. However, these documents and other information relating to the fund(s) will not be distributed to persons in any country where such distribution would be contrary to law or regulation. They can be accessed online at www.capitalgroup.com/europe, where latest daily prices are also available.

The tax treatment depends on individual circumstances and may be subject to change in future. Investors should seek their own tax advice. This information is neither an offer nor a solicitation to buy or sell any securities or to provide any investment service.

 

 

A summary of Fund Shareholder Rights is available in English, French, German, Italian and Spanish at https://www.capitalgroup.com/eu/investor-rights/

CIMC may decide to terminate its arrangements for marketing any or all of the sub-funds of Capital International Fund in any EEA country where such sub-fund(s) is/are registered for sale at any time, in which case it will do so in accordance with the relevant UCITS rules.

 

© 2023 Capital Group. All rights reserved. WF3945297 CIMC/CGUKMC

January 18, 2023

Article: Where can UK investors look for consistent income streams?

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Capital Group UK – Global High Income Opportunities​

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Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.