Global bond funds fared reasonably well in the first half of 2017 after a difficult end to 2016. Year-to-date through June 2017, the average fund in the Global Bond Morningstar Category was up 5.23% (in USD terms), against a loss of 5.66% in the last quarter of 2016. In comparison, the Bloomberg Barclays Global Aggregate Bond Index delivered 4.41% and -7.07% in the respective periods.
Policy and politics have continued to drive the financial markets. Donald Trump’s victory in the US presidential elections late last year spurred the reflation story that had been building up for a few months and led to a backup in global bond yields.
Meanwhile, central banks were in a tightening mode with the Fed raising rates in December and the ECB cutting back on its bond buying programme. The risk-on rally that started after the US elections carried into 2017, though the confidence around the reflation or “Trump trade” started to unwind with the administration’s unsuccessful repeal of the Affordable Care Act.
However, the results of the Dutch and French elections provided the markets with some comfort. Emmanuel Macron’s win in the French presidential elections was particularly supportive of markets, especially French banks.
Although there was the issue of junior bonds in some European banks, such as Banco Popular, being wiped out, the markets were able to side step it.
Overall, riskier areas of the fixed income markets such as financials, high yield and emerging market debt were some of the better performers in the first half of 2017. Expectedly, funds with biases towards these areas also performed well over the period.
Brexit negotiations continue
Going forward, policy- and politics-related themes are likely to continue. On the politics side, we have the Brexit negotiations and German federal elections. On the policy front, we have the central banks stepping back from close to a decade of monetary easing.
With the broad upward trend in global economic growth and inflation (though their durability and sustainability is questionable in certain areas), most major central banks have embarked on some sort of tightening – Fed has hiked rates three times since December 2016, ECB tapered bond-buying to EUR 60 billion per month, and BOJ moved to yield curve control; though BOE hasn’t raised rates, the balance of opinions within the MPC has been shifting.
This has driven a number of managers to retain a cautious stance, especially on the rates front. During recent reviews, we have seen many of them running lower/underweight duration, though adjusting it tactically and focusing on diversifying their portfolios and the sources of return. Some have also cut back on credit risk after the rally in riskier fare.
That said, the recent move up in core government bond yields makes them slightly more attractive (though still overvalued) than where they were a year ago.
Meanwhile, improving economic conditions are likely to create pockets of value, such as in emerging market debt (though opportunities here are idiosyncratic).
Global bond funds with the ability to scour such opportunities are poised to benefit from these.
Largest funds to watch
Some of the below mentioned funds have continued to maintain their stature as the largest in the space over the last few years.
Despite seeing considerable outflows since hitting peak assets around mid-2013, the Templeton Global Bond and Templeton Global Total Return funds remain two of the largest funds in the sector. The Templeton Global Bond is co-managed by Michael Hasenstab and Sonal Desai. Hasenstab’s expertise in macroeconomic analysis and a well-resourced analytical team underpins these offerings.
He doesn’t construct the portfolio with traditional issuance weighted global-bond benchmarks in mind. Instead, Hasenstab and his team aim to identify value among currencies, sovereign credit, and interest rates in countries with healthy or improving fundamentals that they think the market underappreciates.
The fund has had almost no exposure to the debt of the United States, eurozone, and Japan, which dominate most rival portfolios. It also stands out for its significant, and longtime, bets against the euro and yen.
The contrarian-minded group attempts to find those opportunities early on and then watch as their theses unfold over several years.
Moves of that kind have led to sharp, short-term bouts of underperformance, but over time, long-term-focused investors have been amply rewarded. The fund is rated Silver by Morningstar.
The Templeton Global Total Return fund is managed by the same team using an identical approach as the Templeton Global Bond Fund. However, it takes more risk than its government-only sibling, Templeton Global Bond, and has held up to a 20% stake in corporate bonds. The fund is rated Bronze by Morningstar.
The Vanguard Global Bond Index fund is one of the largest passive funds in the space, having more than doubled in size since the beginning of 2015. The global multisector nature of the fund is designed to make it work as the central fixed-income element in a portfolio.
This passive offering could also serve as a “one stop shop” for developed market investment grade rated fixed-income exposure. The fund is managed as a multiteam effort, with Vanguard’s three key centres – US, Europe, and Asia/Pacific – responsible for the management of their domestic exposure. Its objective is to replicate the performance of the Bloomberg Barclays Global Aggregate Float-Adjusted TR Index at the lowest possible cost.
The fund does a very good job at tracking its benchmark. Considering the practicalities of the index and the fund’s use of stratified sampling to replicate its performance, this level of tracking accuracy is a strong positive. The fund is rated Silver by Morningstar.
The JPMorgan Global Corporate Bond fund is managed by a team of five managers led by Lisa Coleman. She has been at the helm since the fund’s inception in March 2009 and boasts almost three decades’ experience in corporate credit investing. She is based in the US and, along with co-managers Lorenzo Napolitano and Jeremy Klein, is responsible for the US credit portion of the fund.
Based in London, co-managers Andreas Michalitsianos and Usman Naeem, look after the UK and European credit allocations respectively. This is a pure-play credit strategy and thus off-benchmark exposure to non-investment-grade credit is limited to 10%, a modest amount relative to peers.
Duration is also matched closely to that of the Bloomberg Barclays Global Aggregate Corporate Index. The disciplined investment process exploits the full extent of resources available to the team.
The macro credit strategy, formulated by the broader fixed-income group’s quarterly forum, shapes the portfolio’s credit-risk stance and market tilt (US dollar, euro, and sterling), while the managers rely heavily on a team of around 20 analysts, dedicated to investment-grade credit research, for bottom-up idea generation. The fund is rated Bronze by Morningstar.
