Two fixed-interest funds have recorded equity-like double-digit returns in a financial year where the average return hovered below 2 per cent for fixed interest funds under Morningstar coverage.

Silver-rated Bentham Global Income and Legg Mason Brandywine Global Opportunistic Fixed Interest returned 11.48 and 10.39 per cent, respectively, in FY 2021.

The former holds mostly corporate credit along with some non-standard credit instruments. The latter holds a mix of government and corporate debt and cash.

The Legg Mason fund also topped the 3-year annualised return at 5.44 per cent.

The average one-year return for the sixty fixed interest funds under Morningstar coverage was 1.73 per cent, versus 6.92 per cent for the top ten performers.

Forty-one funds had a positive return while nineteen were down for the year.

Multi-Strategy Income funds like Bentham, and Diversified Credit funds, such as Perpetual Wholesale Diversified Income, dominated the top ten performers.

Both categories have a higher risk/return profile. Diversified credit focuses on corporate bonds instead of government bonds. Multi-strategy income funds hold a combination of security types, some less conventional, to enhance yields.

These funds have benefited from a rally in riskier credit following the March 2020 downturn. Economic recovery and central bank support eased initial fears of mass defaults in corporate debt markets.

The Morningstar global high-yield bond index (GR) is up 6.94 per cent on a one-year basis, versus -5.87 for an investment grade equivalent.

Fear of higher inflation in the year's first quarter led to a rout in bond markets as investors sold off longer duration bonds that could be eroded by inflation. Government bonds tend to be higher duration.

Passive funds with exposure to government bonds were among the worst performers.
The iShares Australian Bond Index, Vanguard Australian Fixed Interest Index, Vanguard Australian Govt Bond Index and Vanguard International Fixed Interest Index Hedged lost an average of -1.25 per cent.

Australian fixed interest was the worst performing category, with an average return of negative 0.15 per cent.

But over a three-year horizon returns for the different categories are similar. Australian bonds returned 3.79 per cent versus 3.3 per cent for diversified credit.

Search in the interactive table below for your fund to see its 1-year performance and Morningstar analyst rating. You can find more data on Morningstar Premium.