Global bond funds that have performed well throughout the year took an active approach to choosing p...
Global bond funds that have performed well throughout the year took an active approach to choosing positions ' the portfolios typically had long durations and invested in euros.
The Mellon Global Bond fund was ranked number two for the year in the global bond sector. The fund had a positive return over the year of 12.24%.
Stewart Cowley, a director of investment management fixed income at Mellon, says that, unlike some of his competitors, he has been positive on the bond market for the majority of the year. Other managers did not have a positive outlook on the markets and focused their funds elsewhere.
According to Cowley, the strategy of the fund was to keep focused on the big gravitational forces that have pulled the bond and currency markets this year, while side stepping some of the economic noise that has confused other managers. Pension funds, for instance, have been buying more and more long-dated debt no matter the economic conditions creating a 'bond bubble' as too many investors chase too few fixed interest assets. At the same time governments have been more and more reluctant to issue long-dated debt. This putting a premium on the value of these rarer securities.
He says that the imbalances in the system will eventually make the yield curve become systematically inverted ' long dated yields will have much lower yields than bonds with shorter maturities. In addition, he sees fixed interest and equity markets moving closer together, blurring the choice between the asset classes. Because of this effect investors are not getting the same type of return on the equity markets and are moving more and more into bonds.
To reflect the Newton research results, Cowley has held long duration positions in developed, western economies, where the supply/demand imbalances are potentially worst, in anticipation of further yield declines (rising bond prices). The majority of his holdings were in high quality government debt. Cowley was also early in spotting the decline of the US dollar. His dollar exposure was reduced in the beginning of the first quarter of this year and the portfolio was invested in euros. Another reason the fund performed so well throughout the year is it did not have any positions in Japan.
Cowley thinks the Japanese economy remains in the policy doldrums and the yen is set to depreciate further.
The Credit Agricole funds global bond was in eighth position. Its return throughout the year was 10.61%.
Cedric Morisseau, manager of the fund, says it has been well diversified throughout the year across two separate risk allocations: global bonds and currencies.
Throughout the year the portfolio has been long in US treasuries until July 2002, long in EU bonds, short gilts, and short Japanese bonds. On the currency side the portfolio has been very long euro against dollar and yen
The fund is actively managed and Morisseau attributes its good performance because of its risk allocation. This is decided through seven different risk vectors: global exposure; country allocation; yield curve allocation; credit that must be a minimum of AA2; short term trading; currency allocation; and bond selection.
The correlation between these risk elements must be taken into account before taking a position, so as to maximise diversification.
The portfolio is benchmarked to the JP Morgan Government bond global index and has a tracking error of 2.5%.
While the fund performed well throughout the year, there was some slight underperformance throughout the year. Morisseau says this was because of the expense ratio. This is 1.14%, which, when extracted from the performance of the fund, gives a slight underperformance.
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