despite a high alpha, the colin hart managed fund has generated returns of 35.3% over three years and 13.12% over one year, offer-to-bid
The 12 months to the end of July have been encouraging for funds in the global bond sector, with every fund with a one-year track record posting a positive return.
The sector average performance of the 46 funds in the sector over one year was 13.65%, while over three years the average was 19.92%.
These high levels of growth were achieved with a mean annualised alpha for the sector of just 0.55.
The Baring Global Bond fund, managed by Colin Hart, is one of the top performing funds over the three years to the end of July and has also turned in positive returns over each of the three discrete 12-month periods.
Despite having the highest alpha in the sector at 6.8, Hart has managed to keep the beta of the fund at lower than average, posting a figure of just 0.6.
Consequently, according to S&P figures, the fund generated a return of 35.3% over three years and 13.12% over one year, on an offer-to-bid basis.
Aidan Kearney, fund of funds manager at Artemis Investment Management, is a holder of Hart's fund. He said the team's decision to become more defensive this summer has been a factor behind its recent performance.
The fund has gradually moved away from long-dated to short-dated bonds, which Kearney said proved very protective when bond markets turned in July this year.
Historically the Baring fund retained a high exposure to UK and European bonds to maintain its Pep status and while this no longer applies, Kearney said it has been a policy Hart has stuck to.
Whereas in the global bond environment the average fund holds around 50% in US, 20% in Europe and 10% in the UK, Hart holds 60.7% of his portfolio in the UK, 29.5% in Euroland and 9.9% in Canada.
Hart said he continues to be negative on the dollar, and his 5.3% US bond exposure is offset by negative dollar currency positions.
Stewart Cowley, manager of the Newton International Bond fund, predicted late last year that US Treasury bond yields could go lower than 4% and as a result he went long on US bonds. Kearney said this decision proved correct and proved beneficial to the fund's performance.
However, a sharp correction in bond markets in July caused by the Federal Reserve's change of heart on direct activity in bond markets, caught Cowley off guard and the fund has underperformed over three months.
Despite this however, the fund has posted an overall three-year return of 28.36% and has recorded growth over each of the three discrete annual periods to the end of July.
But unlike Hart, Cowley's alpha of 2.23 has been achieved with more risk with the fund posting an above average beta of 1.14.
However, Kearney pointed to Cowley's strong strategic capabilities: 'He is a good reader of trends in the market and he expects lower bond yields to return in the future.'
Like Cowley, Paul Read and Paul Causer, managers of the Invesco Perpetual Global Bond fund, are running a fairly high beta of 1.18 and this has led to strong returns over one and three years. The fund is up 32.63% over three years and 20.84% over one year, which has given it an alpha of 3.16.
The two managers believe that the government bond sell-off and improved tone of economic data have masked the economy.
While there is speculation about a bubble in government bonds, Read and Causer take the view that the asset class is fully but fairly valued.
In accordance with their expectations for the Bank of England to cut interest rates further and in light of continuing mixed economic data, they believe the current backdrop in both government and corporate bond yields is sufficiently supportive.
While the long-term drivers of corporate bonds remain in place, they argued yield spreads could still narrow, while the number of bond defaults is still dropping.
If the rise in yield continues, they said this may represent a buying opportunity.
Richard Philbin, fund of funds manager at Isis Asset Management, does not have any exposure to the Global Bond sector, partly because of its volatility and partly because of its low levels of dividend income.
Philbin said the volatility in the sector is higher than the typical corporate bond fund because there is a lack of currency hedging.
Consequently, Philbin feels he is better served getting his international bond exposure through the UK Other Bond sector, which allows for the hedging of currencies.
Philbin pointed to other shortcomings in the global bond market. He said: 'In global bonds you do not get as high a level of income as you get in the Corporate Bond sector and the UK Other Bond sector.
'As a result you need the capital to work harder in order for the total return to be higher.' Philbin has not been invested in the sector for the last five years and cannot imagine changing this stance going forward without fundamental change such as the UK adopting the euro.
Gary Potter, fund of funds manager at Credit Suisse Asset Management, said the safe houses to invest with are those with a large amount in bonds, with substantial teams that analyse all the drivers of global bonds, such as currencies, economies and macroeconomics. Such houses include Barings, Threadneedle, Invesco Perpetual and Investec, which runs global bonds offshore, Potter said.
He added it is important to understand how all the different classes of bonds interact. As such, these houses have done well because they have capabilities that cover all classes of bonds, from government right down to corporate paper.
However, he said there are some niche players like Newton and Thames River, which despite not having these large resources, have experienced managers.
In the case of Thames River, this experience comes with its recent appointments of Peter Geikie-Cobb from Insight and Paul Thursby from Barings.
He said: 'The managers who do well are those who refer to the benchmark, but are not driven by it.
'If we do see a global recovery in the next 12 to 18 months, it will be those managers who are pragmatic with their portfolios who achieve the best returns.'
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