iShares Corporate Bond Index: August 2024 fund update

• BlackRock, a pioneer in index investing, has a great record of managing index funds

• We view this fund as a good option to get access to a broad spread of sterling corporate bonds

• The fund has closely tracked the iBoxx Sterling Non-Gilts Index since launch in 2010

• This fund currently features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The iShares Corporate Bond Index fund offers a way to invest broadly across the corporate bond market with a large allocation towards the UK. As well as corporate bonds, the fund invests in bonds issued in Sterling by governments, government agencies and supranationals, but excludes gilts which are bonds issued by the UK government.

An index fund is one of the simplest methods of investing, and we think this fund could be a great, low-cost addition to a portfolio. Bonds can be a useful way to help diversify a portfolio focused on shares or other assets, or a more conservative portfolio in need of some income.

Manager

The fund is managed by the BlackRock EMEA Index Fixed Income Portfolio Management Team, led by John Hutson. Hutson has been at the firm for 12 years and has over 20 years of experience in the industry. He previously had responsibility for Credit Index Investments within the team.

While Hutson leads the team, each index fund at BlackRock has a primary and secondary manager, though in practice a broader team helps to manage each fund. Divya Manek is the Head of Investment Grade Credit and Emerging Market Debt at BlackRock and the lead portfolio manager on this fund.

Within the team, portfolio managers rotate their responsibilities, which gives them experience across different regions like the UK, the US and Europe. This ensures continuity in the way the index funds are managed, even if there are team changes.

BlackRock also has other teams that trade shares and bonds based across the world. The teams function in different time zones, which means they have access to timely information, and can provide input on market trends and corporate actions. Their global approach helps drive efficient management of their funds, while providing simple and effective tracking options for investors.

Process

This fund aims to track the performance of the broader corporate bond market, as measured by the iBoxx Sterling Non-Gilts Index. It invests in almost every bond in the index. This is known as partial replication, which could help the fund track the index closely without incurring the cost of holding every bond. Bonds that make up a very small part of the index can be more difficult or expensive to buy and sell.

The fund invests in around 1,200 holdings and is predominantly made up of issuers that conduct most of their business in the UK, US, Germany and France. While the fund mainly holds investment grade bonds, meaning they have a credit rating of at least BBB, it can hold some high-yield bonds at times, which increases risk.

In any index tracker fund, factors like taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance. To reduce the tracking difference between the fund and the index, BlackRock cross trades bonds internally across all its own funds. This helps to reduce transaction costs.

The fund can lend some of its investments to others in exchange for a fee in a process known as stock lending. This offsets some of the costs involved with running the fund. Since BlackRock’s lending program started in 1981, only three borrowers with active loans have defaulted. In each case, BlackRock was able to repurchase every security out on loan with collateral on hand and without any losses to their clients. Even so, stock lending is a higher risk approach.

Culture

BlackRock is currently the largest asset manager in the world, running around $10.5trn of assets globally as of May 2024. The company was founded by eight partners including current CEO Larry Fink and is known for both active and passive strategies. Employees at BlackRock are encouraged to hold shares in the company so that they are engaged with helping the company perform well and grow. The iShares brand represents BlackRock’s family of index tracking and exchange-traded funds.

As the world’s largest asset manager, and with lots of resource and knowledge under its belt, BlackRock benefits from unique access to the marketplace, which can help reduce trading costs. BlackRock is also a pioneer in the passive investment space and has a track record of innovation in this part of the investment market.

The team running this fund also works closely with various equity and risk departments across the business. We believe this adds good support and challenge on how to run the fund effectively.

ESG Integration

BlackRock was an early signatory to the Principles for Responsible Investment (PRI) and has offered Environmental, Social and Governance (ESG)-focused funds for several years, including through its iShares range of passive products. However, it only made a company-wide commitment to ESG in January 2020. Following that announcement, the company promised to expand its range of ESG-focused ETFs, screen some thermal coal companies out from its actively managed funds and require all fund managers to consider ESG risks.

BlackRock’s Investment Stewardship Team aims to vote at 100% of meetings where it has the authority to do so. The Investment Stewardship team engages with companies, in conjunction with fund managers, and the results of proxy votes can be found on the BlackRock website’s ‘proxy voting search’ function. The firm also outlines its work on voting and engagement in annual and quarterly Stewardship reports.

The firm has courted controversy in recent years for failing to put its significant weight behind shareholder resolutions aimed at tackling climate change. It responded by committing to be more transparent on its voting activity and providing rationales for key votes. In 2024, Blackrock announced that its US arm would step back from the Climate Action 100+ collective engagement initiative, citing legal considerations, although it suggested its international arm would remain a member.

The iShares Corporate Bond Index fund is a passive fund designed to track an index that doesn’t specifically integrate ESG analysis or exclude bonds issued by companies that are deemed to be ESG sinners, such as those involved in weapons or tobacco.

Cost

The fund has an ongoing annual fund charge of 0.11%. We believe this is a reasonable charge when compared with other sterling corporate bond tracker funds. Our platform charge of up to 0.45% per annum also applies, except in the HL Junior ISA, where no platform charge applies.

Performance

Since launch in June 2010, the fund has done a good job of tracking its benchmark. During that time, the fund has returned 58.06%*. As is typical of index funds, it’s lagged the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped to keep performance tight to the index.

Over the last 12 months, the fund has tracked the index closely, gaining 9.33%. Remember, past performance isn’t a guide to future returns.

Bond markets have been volatile during the year. There was a strong rally at the end of 2023 led by the expectation that interest rate cuts were on the horizon. Bonds however lost some value at the beginning of 2024 as most major economies held off on lowering rates and expectations were pushed back.

The European Central Bank (ECB) were among the first major central banks to lower interest rates in early June. They were followed more recently by the Bank of England, who cut rates from 5.25% to 5% after remaining at 16 year highs for a full year. The US Federal Reserve (Fed) are yet to make their move but are getting closer to cutting rates as inflation continues to fall.

Bond yields typically move in the opposite direction to prices, so it was no surprise that yields fell sharply when bond markets rose at the end of 2023. Since then, yields have gone back up and are at attractive levels not seen in over a decade. At the end of July, the fund’s yield was 3.17%. Yields aren’t guaranteed and shouldn’t be considered a reliable indicator of future income.

Given BlackRock’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well in future, though there are no guarantees.