absolute fund rankings show high volatility for all but there is still a substantial gap between the best and worst funds
Fixed income global bond funds have gone through a very volatile period over the past five years, buffeted by global uncertainties such as the Russian crisis and the US recession.
The most noticeable thing about this time period is that very few funds managed to sustain any kind of consistency - their position relative to one another in the rankings is so volatile that it is difficult to tell from the graphs which funds have been the best performers over all.
Despite this bouncing up and down the ranks, there has been a substantial difference in performance between the top and bottom funds. The best performing fund over five years was the Oppenheimer International Bond fund, which returned 63.46% in that period, according to Standard & Poor"s statistics. The bottom fund - the North Star Dollar Growth, lost -18.52%. And near the top, the Templeton Global Bond fund managed to return 39.02% over the past five years.
Michael Hasenstab, co-portfolio manager of the Templeton portfolio, says: "The main good performance of the fund can be attributed to its medium to long-term strategy. The portfolio is actively managed, so while we may look at indexes we are not constrained by them. We focus on identifying medium to long-term macro and currency trends on where the largest opportunities are. Fundamentals such as inflation growth and interest rates are examined. Benchmarks are derived from what interest rates should be depending on market conditions."
However, the portfolio went through periods of fluctuations in performance. According to Hasenstab, the fluctuations in the fund over the five-year period can be attributed to this long-term strategy. The portfolio does not sell out for short-term variations in the market. From 1998 the portfolio"s performance went down until mid-1999.
"The portfolio underperformed for two reasons. This was because of an underweight position in the yen - during this time period there was a short-term rally in the yen. In addition, the Russian crisis in 1998 increased the volatility of the portfolio. When the situation started improving, the portfolio recovered," says Hasenstab.
Throughout 2000 the product performed well as it was invested in US dollar denominated sovereign debt in Latin America, Eastern Europe and Asia. There was a recovery in these markets.
Although it dipped down in the beginning of 2001, the portfolio picked up in mid-2001. According to Hasenstab, this was because towards the end of 2001 the US economy was going into recession and the market was beginning to price in that bonds had peaked.
Hasenstab decided to use this time to invest in US treasuries while there was short-term volatility in the market place. However, the recovery was shaky and the market slowed. The portfolio went down in performance until mid-2002.
By mid-2002 Hasenstab started selling US treasuries and in mid-to-late 2002 the fund was almost entirely invested in foreign currency bonds. These included New Zealand, Swedish and Australian government bonds. This was because these countries had high yields relative to the US and inflation dynamics had been decreasing. It was also a move that paid off for the portfolio as it started to outperform.
Although the Carlson International Bond fund achieved negative performance of -1.15% over a five-year period, throughout this time scale it has also benefited from phases of out-performance.
Torbjorn Hamnmark manages the portfolio by using a strategy based on yield dynamics. Hamnmark says: "This means that we use traditional macro based yield curve and duration strategies. We also have a degree of active FX risk in this fund. Since we only create exposure based on our belief in how the yield curves will develop, we use government bonds to represent different points on the different yield curves in our portfolio.
"This strategy has been consistent over the life of the fund. We do not emphasise specific security selection strategies since they can add only little value in this type of product. We chose a large enough number of bonds to represent the entire yield curve - that is our goal in the portfolio construction phase."
Throughout 1999 the product"s performance was flat and was ranked near the bottom. According to Hamnmark uncertain market developments lead us to take smaller risks, we were wrong in our assumptions for a large part of the year as well.
However, from mid-1999 the fund started to outperform and was ranked near the top. This was the result of a stronger investment process with a step wise analytical process supporting Carlson"s yield dynamics-based risk-taking philosophy. The portfolio became more diversified in its portfolio strategies using more risk dimensions. This included not only duration, but curve and FX at the same time.
In 2000, the portfolio dipped slightly, then went up and dipped again to be ranked near the bottom. In late 2000 the portfolio started to out perform and in early 2001 was ranked back top.
Hamnmark says: "It was only in late 2000 that bond markets began to react to the fallout in the equity markets in the US economy. However, after the Fed cut interest rates in January 2001 a strong bond market period was initiated."
Nethertheless, in mid-2001 the fund dropped down to the bottom again. According to Hamnmark, even before 11 September, there were new thoughts that general market sentiment was too gloomy and bond yields therefore too low - this strategy did not pay off until later in the year.
It was not until late 2001 the product started to outperform. "We traded against the very negative growth sentiment that was created after 11 September and benefited a lot when things normalised towards the end of the year," says Hamnmark.
But, the portfolio was not prepared for the very strong bond market that started in the early summer of 2002, that coincided with a large increase in risk aversion with higher credit spreads and lower equity markets as a result. In mid-2002 the portfolio dropped in performance.
The fund increased its performance in late-2002. Late-2002 also saw a good rally in short term bonds that fitted with the company view that too much monetary tightening was priced into - in particular - the US bond market.
In 2003 the portfolio dropped in performance and stayed flat for most of the year. It is only recently the portfolio has been positive since late spring.
This is based on largely Carlson"s view on the Japanese and US bond markets and also the view on relative developments between the US and Euro bond markets and on the dollar currency.
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