the core government bond fund beats rest of the global bond sector
Just four global bond sector funds found themselves in negative territory at the end of the three years to 28 February.
Unsurprisingly it was one of the core government securities funds that found itself top of the pile as investors sought sanctuary from equities.
Top-placed Newton International Bond pipped several funds to the post with a three-year return of 38.13%, bid to bid, ahead of the sector mean of 23.15%. Of the 41 funds in the sector, 14 posted returns above 30%, 18 managed 20%-30%, three returned 10%-20% and just two 0%-10%. Of the four funds posting negative returns, Invesco Perpetual European High Yield was the biggest underperformer, dropping 20.7% over the period.
The sector average return over the 12 months to 28 February 2001 was 12.68%, followed by -1.22% in the following 12 month period and 9.26% in the 12 months to the end of February 2003.
The portfolio of Newton International Bond is entirely comprised of government debt. At the end of January 2003, American and German issues are weighted at about 25% each in the fund, with Italian government bonds at 17%.
The fund's three-year annualised alpha is 4.44%, compared to the peer group mean of 0.66%. The beta over that time period stands at 1.06, against the group mean of 0.99.
Stewart Cowley has managed the £233.5m fund since July 2001. The fund, he said, chooses to stay out of corporate debt despite the recent strong performance by the asset class, choosing to avoid the complexity inherent in corporate paper.
'Investors regard this as a core holding with satellites around it. If they want corporate debt, people tend to use specified funds,' he said.
Around 60% of the fund is currently invested in long-dated debt of eight years or longer, although the portfolio is not closely benchmarked for duration. Cowley said: 'In 2000 the duration of the fund was between nine and 10 years which was very, very high because I think we were some of the people who latched on early to problems coming out of the equity market. A fairly limited currency bet but a high duration bet was really the theme for 2000.'
Through late 2001 and 2002 some duration was substituted for a much more active currency position which was very dollar and yen negative but very pro euro. Duration was pared back to between 6.5 and eight years.
Cowley said Newton analysts forewarned the fund in the second quarter of 2002 that foreign investor M&A activity in the US was starting to collapse. 'We then saw the dollar's over-valuation and started to sell the dollar for euros as well as some of emerging Europe.
'Japan, meanwhile, has been completely out, because we are big thematic investors, looking for the big gravitational forces driving the markets, and Japan has violated a number of our themes.'
Cowley noted around 18% of the fund's American dollar holdings are unhedged, as compared to 50% a year ago.
Eyeing EU accessions, the fund has doubled emerging Europe holdings to around 10% in the past year, with a bias to the larger Polish and Hungarian markets.
Looking at pointers for the future, Cowley warned inflation-linked markets' current calculation of implied Western inflation is too high.
Yield curves are very steep partly because market players are pricing in the inflationary tendencies of government spending. But these would be outweighed longer term by stronger influences, such as the deflationary impact of cheap Chinese labour.
China's fast growth is one of several key themes pushing up the fund's long-dated bias, concluded Cowley. Others include the low growth, low inflation West and the excess of demand for fixed interest assets compared to the limited supply, which is being exacerbated by asset-liability mismatches among pension funds.
European high yield bond funds have had a torrid time since the tech, media and telecoms peak. M&G European High Yield Bond lost -15.43% in the three years to the end of February. This was largely down to the -29.65% hit which it took in the 12 months to the end of February 2002, against a sector average of -1.22%, bid to bid.
The fund's three year annualised alpha and beta figures were -17.68% and 2.01 respectively.
David Fancourt has managed the fund since taking over from Jim Leaviss at the beginning of the year. He said: 'The overall profile of the fund does not really change. It has a bottom-up style, trying to avoid losers within the asymmetric return profile of bonds to find good yield returns.
'We generally buy European companies we can visit the management of.'
Around 80% of the fund stays in B and BB corporate bonds. If good value is apparent there is flexibility to buy into BBB or investment grade issues, Fancourt said.
Ahead of the spring 2000 collapse in technology and telecom stocks, the M&G fund had around 33% exposure to the sector. This has since come down to 18%, with around one third of that in investment grade telecoms. Fancourt said he is cautious of telecom fallen angels and has reached a zero-weighting on tech holdings.
Packaging has climbed to 11%, thanks to attractive leveraged buyouts and spin-offs. Food companies have also found favour with Fancourt.
The fund has a 3.1% holding in United Biscuits, one of the larger holdings in a fund with a 5% limit on exposure to any single company.
Fancourt added: 'The market is getting away from heavy exposure to one industry. Tech, media and telecom has died off and other things have flourished.
'I think the better returns we saw in the fourth quarter of last year can be seen as a sector turning point, based on more diversification of names in the market.' Reports that Warren Buffet is now investing much more in investment grade bonds are also strengthening sector flows, said Fancourt.
He also noted the euro's continued rise is boosting the £50.6m fund as it was almost entirely euro-denominated. The fund's 12 month return to February 28 was 14.54%, ahead of the sector average of 9.26%.
The Threadneedle Global Bond fund ranked at 12 out of 41 sector funds over the three-year period, with a return of 31.3%. Its annualised alpha is 3.23% and its beta, 0.95.
Sandra Holdsworth, fund manager since June 2001, said weightings are mainly dedicated to government bonds and other investment grade bonds. Their combined weighting currently stands at 86%. It had been up to 95% in early 2002, 'about as high as it ever gets,' she said.
The remainder of the portfolio is made up of changing allocations to emerging markets and high yield bonds.
'Generally, all the way from March 2000, we have kept exposures to those two asset classes quite low, though we have had periods where we have picked them up for a quarter or so,' Holdsworth said.
Emerging and high yield are currently almost halfway weighted at 14%, around half the 30% limit.
The best performance of the three-year period was recorded over the final 12 months, when the fund returned 12.09% compared to a sector average of 9.26%.
Holdsworth attributed the outperformance to an increased exposure to high yield and emerging market bonds and a severe reduction in exposure to the dollar.
'Lastly we've developed a long duration view on the government bond side and that has added a bit as well,' she added.
The £136.2m fund currently has 115 stocks. Fifty of these are split across sub-investment grade holdings, in line with the policy of diversifying company risks by having very many small holdings.
Last summer the fund moved to a positive bias on telecoms from a negative stance as Threadneedle's analysts backed investment grade companies European governments were shielding, describing them as 'almost too big to fail.'
Emerging favourites over the three years have included Romania and Ukraine. Russia has recently offered excellent returns, added Holdsworth, but the fund remains cautious on Poland due to its internal problems. Due to high volatility, the fund invests no more than 2% in any one emerging stock.
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