Fidelity launches very first passive fixed income funds. What are they and should you invest in? – It’s money


Asset manager Fidelity International has broadened its range of passive funds with the launch of a new UK government bond and corporate bond index in sterling.

The new additions are the first bond funds to be launched in the group’s range of indices which was established in 1996 but which has so far only included funds investing in equities.

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

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

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

As traditionally inexpensive options compared to their active peers, the latest passive offerings have a continuous charge rate of around 0.10%.

But what exactly are they, what do they do and why should you consider them as 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 of stocks that match or closely resemble financial market indices such as the FTSE 100 or the S&P 500.

They are not actively managed by a fund manager, but rather follow their benchmark regardless of market conditions. For this reason, portfolio turnover and costs are often lower than their active counterparts.

Instead of owning stocks like an equity fund, a fixed income fund invests in bonds which are loans made by an investor to a borrower – borrowers are usually companies or governments.

Fixed income securities 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.

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

Fidelity OEIC Index fund range
Funds Current charges 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 Fund Europe excluding UK 0.10
Fidelity Index Japan Fund 0.10
Fidelity Index World Fund 0.12
Fidelity Index Pacific Fund ex Japan 0.13
Fidelity Index Emerging Markets Fund 0.20
Source: Fidelity International as of August 26, 2020

What are the new Fidelity funds doing?

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

The ongoing charges are 0.10% for the UK Gilt fund and 0.12% 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 seeking to measure the performance of the UK market in ‘gold.

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

Meanwhile, the The Fidelity Index Sterling Corporate Bond fund will track the iBoxx GBP Liquid Corporates Large Cap Index, which provides benchmarks to the sterling corporate bond market. It is up 4.22% since the start of the year.

John Clougherty, head of wholesale at Fidelity International, said there was currently a total of £ 66.4bn invested in passive fixed income retail funds in the UK market, and he didn’t expect an increase.

He added: “Expanding our passive investing capacity to include our first bond funds reaffirms our commitment to provide greater choice to clients, as investors seek efficient and low-cost access to the class of. active.

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

What do the experts think?

Morningstar’s Jose Garcia Zarate said Fidelity has failed to capitalize 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 indicates that they may be ready to start offering their clients passive solutions across multiple asset classes to better meet their allocation needs. active.

“The two new bond index funds are as straightforward as it gets, but they’re also the two main bond market exposures UK investors would like to have in their portfolios.

Interactive Investor's Dilov said launch of Fidelity's dual fund was 'impactful'

Interactive Investor's Dilov said launch of Fidelity's dual fund was 'impactful'

Interactive Investor’s Dilov said launch of Fidelity’s dual fund was ‘impactful’

“ The challenge for Fidelity is that they are clearly behind the party and this is a market where other competitors such as iShares, Vanguard and L&G, have a very strong presence in the UK market. ”

Garcia Zarate said there was “ nothing noteworthy ” about the new funds and even the pricing was in line with other long-established competitors.

However, Teodor Dilov, fund analyst at Interactive Investor, said it was a “ impactful ” launch for Fidelity from a pricing perspective.

“This is not the first time that we have seen a global giant seek to take a piece of the pie from the mighty Vanguard, with subtle undercutting,” he said.

“For example, last year we saw BlackRock launch a portfolio line to compete with the hugely popular Vanguard Lifestrategy line. It certainly looks cheap, but we’ll be keeping an open mind on this launch until it has racked up a performance record.

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

“But the return you get is very low,” he added. “And if and when interest rates go up, you expect to lose capital due to the interest rate sensitivity (duration) of the index. Thus, interest will be paid on the golden index, but you may lose money.

“Fidelity already has a line of index funds that track various stock market indices and this is a natural extension of their line for those looking for no-cost investments.”

However, Ben Yearsley of Shore Financial Planning said he was not a fan of index investing in the fixed interest arena.

He said: ‘I find it hard to see why anyone would buy gilts right now without any feedback on any part of the curve.

“If you want gilts, I would buy individual gilding, because you know for sure what the result will be if you stay mature.

Regarding corporate bond funds, especially given the current interest rate situation, he believes it is more important to avoid the losers than to buy the winners.

He added: “The winners might give you a small raise, but the losers might lose you 20, 30, or even 40 percent if a business goes bankrupt.”

What are the alternatives?

McDermott and Yearsley prefer active funds for those seeking fixed income exposure, and feel that while they come at an additional cost, this is not excessive and they would prefer to use the skills 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, managed by Steve Snowdon, with an OCF of 0.40 percent. He said he has generated strong returns over the past 20 years. Since the start of the year, it has returned 7.92%.

He also recommends the Twenty Four Corporate Bond fund, managed by Chris Bowie which has “a very good balance sheet”. Since January, the fund has increased by 3.71% and its ongoing charge rate is 0.54%.

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

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

“Over the past year, the index has slightly outperformed its benchmark,” he said.

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