Earn a 5.3% tax-free yield from your ISA

The Royal London Short Duration Global High Yield Bond Fund

These are difficult times for income investors, but it is still possible to earn a decent yield if you know where to look. A good example is the Royal London Short Duration Global High Yield Bond fund. This £314m OEIC has carved out a niche area for itself by investing in high yield bonds with less than three years to go until maturity.

The advantage of this approach is that about a third of the portfolio matures each year, which reduces the risks associated with the lack of liquidity in the bond market. A fund with longer dated holdings may have to accept substantially lower prices on its bonds if it was forced to sell them to meet client redemptions, but this would be much less of an issue for the Royal London fund. It also ensures that there is a ready stream of cash to take advantage of new investment opportunities as they come along.

Another attraction is that the high coupons and short period to go until maturity means that the fund has a very low duration of just one year. This means that it is much less sensitive to higher interest rates than most other bond funds.

The lead manager, Azhar Hussain, has run these sorts of mandates for around 12 years and took charge of the Royal London fund when it launched in April 2013. He has successfully managed to find attractively valued high yield bonds that are repaid in full by their issuers and has avoided areas like the energy sector where investors have incurred some serious losses.

The fund’s objective is to outperform the 3-month LIBOR rate by 2% per annum over rolling three year periods and at the end of January it had invested in 72 different holdings. All the coupons (interest payments) on the bonds are paid out, which gives it a distribution yield of around 7%, but most of the securities are purchased above their face value with the capital loss having to be financed out of the income.

At the end of January the Royal London Short Duration Global High Yield Bond fund was yielding 5.3% with the interest paid out quarterly in roughly equal amounts. When held in an ISA the income would be tax-free. This makes it a decent option for risk-averse investors looking for a competitive yield, especially as the ongoing charges are a reasonable 0.59%.