In financial markets, prevailing wisdom rarely stands still for long. Over the past two decades investors have had to navigate the global financial crisis, the era of ultra-low interest rates, the shock of a pandemic and, more recently, a war in Ukraine and the Middle East. Through all of this, one thing has mattered above all else: the ability to adapt without losing sight of valuation. That is central to the story of Royal London Asset Management’s Sterling Extra Yield and Global Bond Opportunities funds.
Sterling Extra Yield has now built a track record spanning more than 20 years, but its continued relevance rests on more than longevity alone. The fund has been shaped by a consistent philosophy: seek out undervalued debt across the credit market and stay flexible enough to act when opportunities arise. Fixed income markets are not static. Risks shift, sectors move in and out of favour and the sources of return available to investors look very different today from how they did even a few years ago. A strategy that can respond to that changing opportunity set, without being forced into positions by a benchmark, offers something differentiated.
Our Global Bond Opportunities fund is the global sibling of our Sterling Extra Yield fund, where both funds are united by the application of one core investment philosophy: we believe that there are fundamental inefficiencies in credit markets.
Valuation at its heart
The funds have a common approach to value; Global Bond Opportunities was launched to complement the success of Sterling Extra Yield but with a greater focus on global markets. In concept, the funds are simple. We believe that credit markets offer investors long-established inefficiencies. Our emphasis on:
- covenants (legal constraints),
- structure (position in the capital structure) and
- security (claim on specific assets)
improves the balance of risk and return and contributes to strong performance over the medium term.
Flexibility is an important distinction. Sterling Extra Yield and Global Bond Opportunities are not ‘unconstrained’ in the sense of being directionless or opportunistic for their own sake. Rather, it is free from the need to hug a benchmark, which allows the team to focus on where value lies. This means the portfolio can move across investment grade, high yield and unrated debt, and can invest in structures or sectors that broader markets may be ignoring or mispricing.
The objective is not to chase the latest trend, but to identify where the balance of risk and return looks attractive and where income is sustainable.
Not all opportunities look obvious
Over the years, that has often meant being willing to invest where sentiment was subdued. Sectors such as banks, shipping, property and structured bonds have all, at different times, offered compelling value when other investors were reluctant to invest or when increased selling was pushing down prices.
The team’s ability to look through short-term adverse sentiment in the market and assess the underlying credit strength of an issuer or structure has been an important driver of returns. In that sense, the fund’s success has not depended on predicting every turn in the macro cycle, it has come more from being prepared to buy assets at the right price when volatility creates dislocation.
There have been occasions when new opportunities have emerged unexpectedly, such as Canary Wharf bonds, where sentiment deteriorated and attractive yields became available on debt the team believed were stronger than the market implied or had risen to levels we felt more than compensated for the risk of downgrade. In the past, we have taken advantage of cyclical lows to invest in secured bonds in the shipping industry, purchased Tesco secured bonds when their credit rating slipped into sub-investment grade, and bought social housing bonds at a very subdued level disconnected from their long-term creditworthiness.
We are open to different sectors, industries, and companies: once again, our flexibility is key.
In financials, legacy capital structures have at times offered attractive compensation when markets have failed to appreciate the incentives on issuers to amend or refinance them. These are the kinds of opportunities that are difficult to access if a strategy is tied too closely to benchmark definitions or narrow sector allocations.
Income, but not at any price
The same flexible mindset has also shaped how the fund has navigated changing interest rate conditions.
From 2020 to 2022, greater use of floating-rate notes was an important tool, particularly in an environment where duration risk has been more volatile and rate expectations have shifted quickly. This investment helped the fund continue to generate income without taking unwanted exposure to long-dated rate moves. That is especially relevant as the market moves from a period of rapid rate rises to one where monetary policy easing is increasingly in view. Rather than making aggressive duration calls, the fund has been able to stay focused on securities that offer attractive cashflows and risk-adjusted return potential, while increasing income as interest rates rose.
Income, of course, has always been central to Sterling Extra Yield and Global Bond Opportunities’ appeal, but it is important to frame that correctly.
The aim is not income at all costs. Instead, the philosophy is that a high and sustainable level of income can be a valuable contributor to medium-term returns, provided the underlying risks are understood and priced appropriately. That is why the fund can own low-coupon or less obvious assets when they offer better overall return potential, while also locking in attractive income when the market presents the right opportunities. The emphasis is on consistency of income generation, rather than claiming consistency of returns in every market environment.
A process tested through cycles
Another reason the strategy has remained effective is that it has been able to evolve with the market itself.
Corporate bond markets today are broader, deeper and in some areas more efficient than they were when Sterling Extra Yield launched in 2003. But that does not mean inefficiencies have disappeared. In fact, as more money has flowed into passive and ‘benchmark-aware’ strategies, the opportunity for active managers willing to research individual credits, structures and legal protections closely has continued. This has been evident in markets such as Nordic credit, where the team identified opportunities early and benefited from attractive valuations, but has since become more selective as that market has increased in profile and attracted a wider investor base. Flexibility, in this context, is not only about being able to go where value exists, but also about stepping back when it no longer does.
That long-term repeatability is what gives the fund’s track record its significance. Twenty-plus years is not simply a milestone; it is evidence that the investment process has been tested across very different market dynamics. The corporate bond market has changed dramatically over that period, and the types of opportunities that drive returns have shifted with it. Yet the core discipline of valuation, selectivity and patience has remained in place.
Strength beyond the manager
There is also a broader team dimension behind that success. While a fund manager’s stewardship is an important part of the story, Sterling Extra Yield, and later Global Bond Opportunities, benefits from the depth and experience of Royal London Asset Management’s wider fixed income desk.
The culture of detailed credit research and willingness to challenge consensus thinking has helped the strategy maintain its edge over time. Successful credit investing is rarely about one bold macro call. More often, it comes from repeatedly making sound decisions on individual securities, sectors and structures, and from having the conviction to act when the market misprices risk.
For today’s investors, that makes Sterling Extra Yield particularly relevant. Traditional bond allocations can sometimes leave portfolios overly exposed to a narrow set of macro outcomes, whether that is a particular interest rate path or a specific credit environment. Markets will continue to change, volatility will continue to create winners and losers, and opportunities will continue to appear in places that are temporarily unfashionable. The value of a flexible, valuation-led strategy is that it can go looking for them - investing not in the prevailing trend, but in the opportunities that trend leaves behind.
Eric Holt’s recognition with the Outstanding Fund Manager Achievement Award at this year’s Fund Manager of the Year Awards is a timely reminder of the team effort behind the long-term success of Royal London Asset Management’s Sterling Extra Yield and Global Bond Opportunities funds. While the award recognises Eric’s stewardship, it also reflects the depth, discipline and consistency of the wider fixed income team, whose valuation-led approach has helped both strategies navigate changing markets over many years.
Across more than two decades in Sterling Extra Yield and almost 10 years in Global Bond Opportunities, that success has not been built on following market trends, but on identifying where credit markets are inefficient, where risk is mispriced and where patient, research-driven investing can uncover opportunities that others may overlook.
For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell.
The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change. Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied.
Investment Risk: The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.
Credit Risk: Should the issuer of a fixed income security become unable to make income or capital payments, or their rating is downgraded, the value of that investment will fall. Fixed income securities that have a lower credit rating can pay a higher level of income and have an increased risk of default.
EPM Techniques: The Fund may engage in EPM techniques including holdings of derivative instruments. Whilst intended to reduce risk, the use of these instruments may expose the Fund to increased price volatility.
Exchange Rate Risk: Investing in assets denominated in a currency other than the base currency of the Fund means the value of the investment can be affected by changes in exchange rates.
Interest Rate Risk: Fixed interest securities are particularly affected by trends in interest rates and inflation. If interest rates go up, the value of capital may fall, and vice versa. Inflation will also decrease the real value of capital.
Liquidity Risk: In difficult market conditions the value of certain fund investments may be difficult to value and harder to sell, or sell at a fair price, resulting in unpredictable falls in the value of your holding.
Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Derivative Risk: Derivatives are highly sensitive to changes in the value of the underlying asset which can increase both Fund losses and gains. The impact to the Fund can be greater where they are used in an extensive or complex manner, where the Fund could lose significantly more than the amount invested in derivatives.
Sub-Investment Grade Investment Risk: Lower rated investment grade securities may have large uncertainties or major risk exposures to adverse conditions. The market value of securities in lower rated investment grade categories is more volatile than that of higher quality securities, and the markets in which these securities are traded are less liquid than those in which higher rated securities are traded.
Unrated Bond Risk: Non-rated bonds may have the characteristics of either investment or sub-investment grade bonds. Market activity in unrated securities and instruments may be low for a considerable period of time and this may impact on liquidity.
Emerging Markets Risk: Investing in Emerging Markets may provide the potential for greater rewards but carries greater risk due to the possibility of high volatility, low liquidity, currency fluctuations, the adverse effect of social, political and economic instability, weak supervisory structures and accounting standards.
