Why global bonds work as ‘a hedge against equity market risk’

Improving economic conditions are likely to create pockets of value in parts of the global bond market, according to Morningstar.

Why global bonds work as 'a hedge against equity market risk'

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Best Performing funds (over 3 years) to watch

The funds highlighted below have successfully combined top-down views with bottom-up credit selection. These also emphasise that managers with a long-term, disciplined approach have been rewarded, as they boast strong performance records over longer time periods.

Unsurprisingly, the list of best performing funds over the last three years includes some of the largest funds in the space.

The PIMCO Global Bond Fund has been steered by Andrew Balls since September 2014. When he took over, two new co-managers, both longstanding members of PIMCO’s global fixed-income team, were added to this fund: Sachin Gupta, a credit and interest-rate derivatives specialist, and Lorenzo Pagani, who heads up the European government bond and rates team.

The skilled trio takes cues from PIMCO’s top-down views in constructing the portfolio and scrutinises relative valuations to determine sector, country, and yield-curve positioning.

The fund is benchmarked against the US dollar-hedged version of the Bloomberg Barclays Global Aggregate Bond Index. The lion’s share of the fund is thus typically devoted to government debt from the United States, eurozone, and Japan, though the fund’s sector and regional weights can shift significantly over short periods.

The approach also allows for considerable flexibility, including credit, securitised issues, and emerging-markets-debt investments, which the team has historically used well. The fund is rated Bronze by Morningstar.

The PIMCO Global Investment Grade Credit Fund has been managed by Mark Kiesel since 2003.

Kiesel leverages PIMCO’s deep team of sector-focused credit analysts, a 50-plus group including more than 20 based outside the United States. This fund focuses mainly on investment-grade global corporate bonds, but also holds smaller stakes in high-yield corporates, mortgage-backed securities, emerging-markets debt, and occasional currency bets. PIMCO’s investment committee, of which manager Mark Kiesel is a member, determines top-down positioning for the fund, including industry weightings and interest-rate strategy. PIMCO’s credit analysts and portfolio managers then scrub the universe for bottom-up ideas. The team tends to favour issuers with strong growth prospects and demonstrated pricing power in industries with high barriers to entry. They also make significant use of credit default swaps in building this portfolio. During his tenure, Kiesel has shown the ability to appropriately use the fund’s numerous performance drivers in varied market conditions. The fund is rated Bronze by Morningstar.

The Invesco Global Investment Grade Corporate Bond fund has been managed by Lyndon Man and Luke Greenwood since August 2013; the former being the key risk taker here. Man also leverages on Invesco’s head of global investment grade credit, Michel Hyman, for support on US issuers.

The managers aim to beat the Bloomberg Barclays Global Aggregate Corporate Index (USD Hedged) over a cycle. They employ a long-term thematic approach and populate the portfolio using relative value trades and macro overlays to make the overall fund market direction neutral.

The process starts with the group’s investment strategy team (IST), which aggregates ideas and views from managers, analysts, and traders across Invesco’s wider fixed income team into a top-down framework that provides relative value calls within fixed income.

The managers then implement these themes within their funds though they cannot invest against the IST’s views. In line with the thematic approach, the managers expect to add most value from top-down views.

Newcomer funds to watch

A number of managers have leveraged their strong credit resources to launch global credit strategies.

The T. Rowe Price Global Investment Grade Corporate Bond Fund, launched in June 2015, seeks to maximise returns and outperform the Bloomberg Barclays Global Aggregate Corporate Bond Index (USD Hedged) by investing in a portfolio of global corporate bonds. Since its inception, the fund has been managed by Steven Boothe, who boasts close to two decades’ experience, the majority of which has been at T. Rowe Price. The fund is a collection of best ideas generated by the extensive global network of credit analysts which the manager combines in a portfolio of 75-150 holdings.

 

The Henderson Horizon Global Corporate Bond Fund, launched in November 2014, is managed by James Briggs. The fund seeks to generate a total return in excess of its benchmark, the Bloomberg Barclays Global Aggregate Corporate Bond Index (USD Hedged). The fund consists of a portfolio primarily made up of investment grade corporate bonds.

However, there is a moderate degree of latitude to invest in non-investment grade issues, including distressed debt and use of derivatives including bond futures, options and credit default swaps.

The dedicated analyst bench at Henderson is well-resourced and key to bottom-up idea generation, in addition to helping the manager with implementation.  

The Aviva Global Investment Grade Corporate Bond fund has been managed by Aviva’s head of global investment grade credit – Colin Purdie, head of Asian credit – Jethro Goodchild, and head of US investment grade credit – Joshua Lohmeier since its launch in May 2015. Emerging market debt manager, Anton Kerkenezov, joined the ranks in January 2017. The investment approach combines the team’s macro views with bottom-up security selection.

While broader themes are framed and debated at the wider fixed income team’s quarterly forum, the managers are responsible for their implementation within this portfolio. A team of around 25 analysts spread across the globe supports idea generation for this global strategy.

The fund is benchmarked against the Bloomberg Barclays Global Aggregate Corporate Bond TR Index.

Global bonds overview

Mark Preskett, portfolio manager, Morningstar Investment Management:

“Global Bonds is diverse asset peer group offering investors vastly different risk and return drivers. In its most traditional guise, selecting a fund benchmarked against the Citi World Government Bond index will give you a paltry 1.2% yield to maturity and quite lengthy 7.9 year effective duration. We see this asset class as more of a hedge against equity market risk as a return generator in its own right.

“However, many fund managers are adopting a very flexible approach to global bond investing and taking significant tilts in terms of geographic, currency or duration exposure. For these managers, investing in attractive real yields are more important than tracking a benchmark and many have high weights to emerging market debt and currencies. This is an area where we see good value but an investor needs to be aware that potential diversification benefits from these funds will be lower.

“Finally, investors should also pay close attention to currency exposures and be aware that currency-hedged share classes are widely available. For our UK clients, for example, we have been investing in sterling-hedged global bond funds, which will hold up better if the pound strengthens from what we see as oversold levels.”

 

 

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