Income and capital movement on corporate bond funds

aroominyork

I’d like to check my understanding about income and capital gain on corporate bond funds. These charts for Man Sterling Corporate Bond Fund show both Income and Acc versions. On the first chart, set to Total Return, does the sum of the twelve red blips* – about 0.5% each – represent the distributed monthly income based on coupons received from the underlying holdings? And does the difference between the sum of those distributions and the change in price of the fund represent capital gain… which the second graph, set to Price, shows was just over 2% for the year (and which clarifies that distributions totalled just over 7%)?

*more accurately, perhaps, the downward/left-hand side of the blips?

EthicsGradient

That looks about right. For the "more accurately" bit, I'd suggest "the difference between the trough of the red income version" and the blue acc version at the same moment" - for instance, for the payment at the start of July in your chart, the red goes down very little, because it coincides with the blue going up.

I notice that it's "D Inc" and "C Acc", but the class letters don't seem to be available in both inc and acc versions. When you look at these 2 on Trustnet, you see that over 3 years, C Acc outperformed D Inc by about 1%
Chart Tool | Trustnet
Whether that's because charges used to be different (Trustnet lists them now as the same), or something else, I don't know. Trustnet also confirms the yearly total return was 9.5%, and the growth of price alone 2.3% for the Inc version.

aroominyork

So I decided to do a little number-crunching, especially mindful of discussion on other threads about credit spreads currently being tight. On Trustnet charting I loaded a graph of Vanguard UK Investment Grade Bond Index for 2010 to 2024. I set Without Income Reinvested, then set the timeframe for each calendar year and took visual readings to plot Total Return (from Acc units) and Price change of the Income units. The Distribution row on my Excel shows the difference between the two to represent the distributed income from the underlying units. 

I then got historical gilt yields from https://www.dmo.gov.uk/data/ExportReport?reportCode=D4H and, in the Excel row for gilt yield, I entered the average for each calendar year for medium duration gilts. The difference between the fund’s distribution and the gilt yield represents the credit spread.

It shows that over these 15 years the average spread has been 1.2% but between 2022 and 2024 there has been a negative spread (!), making corporate bonds bad value during those years. It also shows that the average capital gain, represented by Price change of the Income units, has been 0.9%.

Comments please!

aroominyork

aroominyork said:

So I decided to do a little number-crunching, especially mindful of discussion on other threads about credit spreads currently being tight. On Trustnet charting I loaded a graph of Vanguard UK Investment Grade Bond Index for 2010 to 2024. I set Without Income Reinvested, then set the timeframe for each calendar year and took visual readings to plot Total Return (from Acc units) and Price change of the Income units. The Distribution row on my Excel shows the difference between the two to represent the distributed income from the underlying units. 

I then got historical gilt yields from https://www.dmo.gov.uk/data/ExportReport?reportCode=D4H and, in the Excel row for gilt yield, I entered the average for each calendar year for medium duration gilts. The difference between the fund’s distribution and the gilt yield represents the credit spread.

It shows that over these 15 years the average spread has been 1.2% but between 2022 and 2024 there has been a negative spread (!), making corporate bonds bad value during those years. It also shows that the average capital gain, represented by Price change of the Income units, has been 0.9%.

Comments please!

No-one has a comment (partly to confirm I understand this stuff)?

masonic

The issue (and perhaps why you were sometimes getting weird results) is that credit spreads are determined by comparing yields for a specific duration at a specific time. Whereas you were analysing the income paid out over a 12 month period for a basket of assets.

EthicsGradient

If you want to plot the returns more accurately, Vanguard do give historical prices for this fund from November 2014, and distribution data from January 2008:

U.K. Investment Grade Bond Index Fund GBP Dist | Vanguard UK Professional

aroominyork

masonic said:

The issue (and perhaps why you were sometimes getting weird results) is that credit spreads are determined by comparing yields for a specific duration at a specific time. Whereas you were analysing the income paid out over a 12 month period for a basket of assets.

Understood, but where can that data be found? If I want to know today's spread on five year investment grade credit, or three year high yield, where do I look?

masonic

There's very limited data available for the taking, but you could calculate for specific bonds matching your criteria using their YTM.

aroominyork

So when people say "spreads are tight", how do they evidence the statement?

InvesterJones

I trust in Ramin  

But seriously, articles like this one: https://www.columbiathreadneedle.com/en/gb/institutional/insights/making-sense-of-corporate-bond-spreads/ compare two multi-duration indices: FTSE-A Gilts All Stocks Index and iBoxx All Maturity Non-Gilt index

masonic

aroominyork said:

So when people say "spreads are tight", how do they evidence the statement?

Probably using the limited data that is available, or they do the sums. You can find data for US Treasuries vs Aaa corporate vs Baa corporate, and various other comparisons.