Fund briefing: global bonds
Funds in the Investment Association’s Global Bonds sector tend to have a low correlation with other asset classes and can be useful in times of market stress by acting as a bit of a cushion. In the global financial crisis, for example, this sector held up reasonably well.
According to Justin Modray, founder of Candid Financial Advice, most investors should consider having some bonds - and within this allocation it’s advisable to have an element focused on overseas markets.
“Global bond exposure makes sense within most investment portfolios and helps diversify away from investing just in the UK,” he explains. “It also opens up a much wider range of companies and sectors in which to buy bonds.”
This diversification to fixed interest holdings helps provide stability to a portfolio when held alongside growth assets such as shares, points out Patrick Connolly, a certified financial planner with Chase de Vere.
“Fixed interest should be an integral part of most investment portfolios and global bonds have different risk and return characteristics to UK fixed interest holdings,” he says. “They can also provide an attractive natural yield for income investors.”
The IA Global Bond sector is for portfolios that invest at least 80% of their assets in fixed interest securities. However, it contains a wide range of funds with vastly different characteristics.
As well as government and corporate bonds issued globally, funds can also hold bonds denominated in currencies other than sterling, according to Mark Dampier, head of research at Hargreaves Lansdown.
“This means they can have significant exposure to foreign currencies, which will benefit the fund in a weak environment for sterling, as we saw in 2008, but the reverse would be true if sterling were to appreciate,” he says.
He also argues there are relatively few fund managers with the skills required to successfully manage a fund in this sector. “Investors should be sure a fund is suitable for their circumstances before investing,” he adds.
Mr Modray prefers managers with flexible mandates. “Bonds are under threat from possible rising interest rates and inflation over coming years, so having flexibility to try and minimise the potential impact makes sense,” he says.
One of the main problems is deciding which fund to choose, agrees Darius McDermott, managing director of Chelsea Financial Services, who describes the sector as “a real mish-mash” of different bond funds.
“You need to look very carefully as some are truly global, while others are single country or regional funds,” he says. “Some will hedge their currency back to sterling, some will be index-linked, and others will have different durations.”
In addition, some funds concentrate on generating an income, while others are more concerned about sheltering capital. Establishing what you want in a portfolio, therefore, is a crucial first step.
The currency question is important, points out Mr McDermott. “It can be a double-edged sword but over the last year, in which sterling has fallen, many funds in this sector have enjoyed an extra boost,” he says.
With inflation coming back in the UK, and interest rates possibly as low as they will go, there are also questions over the UK bond market. “At times like this having your bond exposure in other areas of the world, could be a big attraction,” he adds.
Adrian Lowcock, investment director of Architas, suggests global bond funds are useful for investors sensitive to bad economic news. “They suit investors looking to diversify their income streams who don’t want to take too much risk,” he adds.
By offering diversification away from the UK domestic bond market, they add exposure to the other main developed areas of the world, he says, particularly the United States and Japan, as well as European countries.
‘”The US market offers good income opportunities because it offers higher yields than the UK bond market,” he says. “Japanese and German bonds don’t offer much income yield at present but can protect against adverse economic or political events in these particular regions.”
In addition, he points out, international bond funds can also be chosen unhedged, meaning investors can take a view on the currency - particularly if they believe, for example, that the pound will fall in value as the UK negotiates its exit from the EU.
For Timothy Haywood, co-manager of the GAM Star Dynamic Global Bond, the key to success is picking the right longer-term themes – and having them play out sooner rather than later.
“This means you spend less money on transaction costs, while clients become comfortable with what you’re trying to achieve,” he says. “We also buy bonds where we see greater upside potential than downside risk.”
Looking ahead, Stuart Edwards, manager of the Invesco Global Bond Fund is optimistic about prospects. “It’s likely that 2017 will have a number of challenges and potential periods of volatility, but the changing macro-economic environment will continue to provide opportunities for global bond investors,” he says.
One to watch: M&G Global Macro Bond
This is a ‘go-anywhere’ fund that aims to deliver income and capital growth over the longer term – defined as more than five years.
It invests in a broad range of fixed income assets, including bonds issued by governments and companies in developed nations and emerging markets.
The fund, which has been run by Jim Leaviss for 17 years (pictured above), can also invest in currency, with exposure to assets gained through both direct holdings and derivatives.
As part of his research, Mr Leaviss spends a lot of time reading up on a variety of subjects, as well as travelling the globe investigating potential investments.
“Travelling broadens your mind and forces you to spend a lot of time looking at something in depth,” he explains. “Quite often you come away with a new perspective on an economy.”
His approach clearly appeals to Hargreaves Lansdown as it’s included on its Wealth 150+ list of funds that offer the best combination of performance potential and low charges.
Mark Dampier, its head of research, praised the willingness of Mr Leaviss to use the fund’s flexibility, invest with conviction, and adjust in response to changing conditions.
“He is one of the few fund managers to do this successfully on a global basis and we believe he has the experience and resources to do an excellent job for long-term investors,” he says.
How much should I invest in this sector?
Low risk: 15%
Medium risk: 10%
High risk: 5%
Consider investing in these sectors if…
- You are looking to diversify your overall portfolio
- You want to diversify your fixed income holdings
- You are looking for global bond exposure
Fund: M&G Global Macro Bond
Manager: Jim Leaviss
Launch date: 15 October 1999
Total fund size: £1.6bn
Ongoing charge: 0.81%
Minimum initial investment: Monthly amount - £10 / Lump sum - £500
M&G Investment Helpline: 0800 389 8600
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.