Royal & Sun Alliance International Financial Services has established the R&SA European balanced yield bond fund.
This is a mirror fund of an existing Royal & Sun Alliance Luxemburg-based fund and it 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 aims to walk the tightrope between risk and reward. It occupies the middle ground between bond funds that focus exclusively on lower-risk investment-grade bonds with low yields and higher-risk funds that invest only in high-yield bonds.
Investment grade bonds tend to perform well when interest rates are falling and this has recently been the case. However, this fund uses high-yield bonds to bolster the yield. Some high-yield bonds have performed weakly in recent months, but there are good investment opportunities where these bonds appear undervalued. This could increase returns if a 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 produced 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 some investors who would prefer a higher percentage of investment-grade bonds, despite the lower yields that would bring. More adventurous investors who feel that high-yield bonds are where the opportunities are may take the opposite view and opt for a fund with a higher proportion of high-yield bonds.
According to Standard & Poor's, the RSAIM European balanced 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.