Threadneedle leads global bonds

The top-performing funds in the eclectic Global Bond sector over one and three years have been emerging bond funds, with Threadneedle's Emerging Market Bond fund, managed by Paul Murray-John, leading the charge.

Both Threadneedle and the other emerging market bond fund in the sector, M&G Emerging Market Bond, are in a different league in terms of performance over one and three years compared to the global bond, European bond and smattering of international high-yield bond funds that make up the balance of the sector.

Indeed, some of the global bond funds in the sector have achieved peer outperformance partly by holding a portion of their assets in emerging market debt, as shown by the Threadneedle Global Bond fund.

Over three years to 25 March, the Threadneedle Emerging Market Bond fund returned 54.5% on an offer-to-bid basis, net income reinvested, and was ranked first out of 37 funds in the sector.

Over a 12-month period, on the same basis, it returned 8.8% and was again the sector's top-performing fund. Despite slipping to second place in the sector over three months on a bid-to-bid basis to the same date, investors would have seen their assets rise by 7.7%.

With just a one-year track record, the M&G Emerging Market Bond fund, currently managed by Richard Ryan following the departure of Ece Ugurtas earlier this year, has not been around as long. But despite this, it has produced returns of 4.6% in the year to 25 March 2002, on an offer-to bid-basis with net income reinvested, ranking it second out of 52 funds. Over three months to 25 March, it has usurped the Threadneedle fund at the top of the tree, returning 8.6% on a bid-to-bid basis with net income reinvested.

These performance figures should be compared to a sector average over three years, one year and three months of 2.2%, -5.8% and -0.8% respectively. However, a straight comparison between these funds and the rest of the sector would be more than a little misleading due to the disparate nature of the constituent funds.

In addition to the emerging market bond funds, the Global Bond sector contains, naturally enough, global bond funds, as well as a number of European bond, high-yield and currency-specific portfolios.

Even when comparing supposedly like-for-like funds, portfolio mandates are often markedly different. For example, the characteristics and risk profile of an emerging market bond fund, essentially a high risk bond play, are completely different from those of, say, an investment grade European bond fund.

The only real stipulation the IMA makes in relation to the sector is that 80% of any portfolio within it must be invested in non-sterling denominated bonds. In short, Global Bond is something of a catch-all sector for funds that do not fit in easily elsewhere, which makes objective analysis between the top-performing and bottom performing funds extremely difficult.

Once the emerging funds are stripped out, the next easily identifiable group of funds, in terms of performance, are the global bond funds.

Sandra Holdsworth manages the £153.1m Threadneedle Global Bond fund, which has outperformed direct competitor funds of late, particularly over the three months to 25 March, on a bid-to-bid basis.

It has returned -0.3% during this time, compared to a sector average of -0.8%, ranking it 13 out of the 52 funds in the Global bond sector. Over the 12-month period to 25 March, it generated returns of -4.5% and was ranked 22 out of 52, this time on an offer-to-bid basis. For both periods, net income is reinvested.

Although global bond funds invest primarily in investment grade debt from around the world, Holdsworth believes her fund has been able to outperform its peers because of its ability to invest a significant portion of assets, up to 30%, in emerging market and high-yield debt.

While she has rarely explored the upper end of this facility, she has utilised this to give her portfolio an extra performance kicker.

She said: 'We currently have around 16% of our assets in a combination of emerging and high yield, which is fairly typical. This is split about 10% in emerging and 6% in high yield. On the emerging side, we like Russian and Brazilian sovereign debt, while on the sub-investment grade corporate side, we are overweight industrials but have been selective on stock picking.

'At any one time, we have a pretty diversified portfolio, with no one holding accounting for more than 0.25% of total assets. We are not taking any disproportionately large risks with holdings denominated in the hard currencies, the notable exception being the yen, which we've steered clear of.'

Holdsworth makes a decision on the amount of exposure to high yield she wants and then hands over the responsibility for the selection of individual companies to Barrie Whitman, Threadneedle's head of high-yield bonds, and his team.

One global bond fund that is not faring so well is the Invesco Perpetual Global Bond fund. Managed by the much respected team of Paul Read and Paul Causer, the fund has won awards, not least from Investment Week, in the recent past for its performance. Recent months, though, have seen performance suffer.

During the three-month period to 25 March 2002, on a bid-to-bid basis, the fund produced negative returns of 1.9%, ranking it 43 in the sector out of 52 funds.

Over one year to the same date, the fund returned -5.2%, this time on an offer-to-bid basis, leaving it in 26th position in the sector. In both cases, net income was reinvested.

The longer-term picture is a little more encouraging, showing, as befits an award-winning fund, positive returns over five years. Using the same measures, it generated positive growth of 8.7%.

Perhaps, unsurprisingly, Read and Causer's mandate is somewhat different to Holdworth's. The fund has held some emerging credit in the past, but not for some time. It does have a small percentage of its assets in high yield but limits this at any one time to no more than 8%-10% of the portfolio.

Read said: 'The performance of the fund in recent months hasn't been that great but over the long term it has done well.

'This is primarily a global government bond fund and, as such, it will do well when the market rallies and badly when the market suits high yield. At

Glossary

Regression analysis: Regression statistics can be used to compare the relationships between funds, markets or a specific benchmark index. They do not make the assumption that the variables (funds) are related as cause and effect, but permit them to be influenced by other variables (markets).

Alpha: The Alpha describes the theoretical reward obtained by one investment when the second investment has a zero return. To calculate the Alpha, the returns of each are taken and compared together to identify their relationship. This reveals relationships between investments in both bull and bear markets. When applied to portfolios, it can be considered to be the return over and above (or below) the market through portfolio strategy. Good managers have a positive Alpha.

Beta: The Beta is the amount the first fund moves when the other moves by one unit. Beta is a measure of relative volatility (absolute volatility is calculated by standard deviation).

If one fund always goes up and down by 1.5 times of the performance of the index, its Beta will be 1.5. This implies that if the return of the index is positive, then 1.5 times this positive return can be expected of the fund. If the index goes up (or down) 10%, the fund goes up (or down) 15%. Beta represents the volatility of the first investment versus the second. It is only an estimate and to be accurate there has to be a perfect correlation between the two investments.

Correlation: Correlation shows the strength of a linear relationship between two funds. A perfect correlation is when the investments behave in exactly the same manner. A perfect positive correlation is represented by 1, perfect negative correlation by -1 and no correlation with a 0. A perfect negative correlation suggests that for every 1% movement by the index we would expect to see -1% movement return on the fund and vice versa. This is an important factor when using modern portfolio theory.

Source: Standard & Poor's

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to