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Balancing act

Royal & Sun Alliance International Financial Services has established the R&SA European balanced yield bond fund.

This is a mirror of an existing R&SA Luxemburg-based fund and will be split equally between investment-grade and high-yield corporate bonds within Europe, including the UK.

The fund produces a yield of 8.5 per cent a year and occupies the middle ground between bond funds that focus exclusively on lower-risk investment-grade bonds with low yields and higher-risk funds investing in high-yield bonds.

Investment-grade bonds tend to perform well when interest rates are falling. However, this fund uses high-yield bonds to bolster yield. Some have performed weakly in recent months but there are good investment opportunities where these bonds appear undervalued. This could increase returns if market recovery is sustained.

Bond funds are currently attractive to investors who may be put off stocks and shares due to volatility and the relatively low returns since the technology bubble burst. Some investors may consider this bond if they want to diversify into bonds and benefit from the tax advantages of investing offshore.

However, this fund will not suit everyone as the risk may be too high for investors who prefer a higher percentage of investment-grade bonds despite the lower yields. More adventurous investors who feel that high-yield bonds provide better opportunities may opt for a fund with a higher proportion of high-yield bonds.

According to Standard & Poor&#39s, the RSAIM European balanced fund is ranked third out of 108 funds based on £1,000 invested on a bid-to-bid basis with gross income reinvested over one month to March 22, 2002.

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