Fund Manager Q&A: M&G Global Macro Bond fund
What is the underlying strategy behind the fund?
The M&G Global Macro Bond Fund is a flexible global bond fund. Its long-term returns are driven by the active management of its duration, credit risk, and currency positioning. The fund does not follow a typical benchmark approach, but is designed to enable the fund manager to express his investment views in an unconstrained way as he seeks to outperform the IA Global Bond sector in the UK.
How do you see the global bond market performing over the next one to two years?
The fund manager does not make forecasts for bond market returns. He manages the portfolio based on where he finds the best relative value, and in the current environment of low government bond yields, the manager believes that government bonds lack value and has therefore positioned the fund with significantly short duration. He finds better relative value in the corporate bond markets, where his favoured themes include investing in floating rate notes (FRNs) from both investment grade and high yield issuers. He considers FRNs to be a convenient way to gain exposure to tightening spreads while avoiding duration risk.
The manager is cautious towards emerging bond markets based on the knock-on effects of slower economic growth in China and the prospect of higher US Treasury yields and an appreciating US dollar. Through selective investments in the asset class, however, the manager has recently reduced the fund’s underweight exposure to emerging bond markets against the backdrop of low yields in developed markets, assessing that the significant pick-up in yields in emerging markets can be appealing.
In terms of the manager’s key currency views, he is optimistic on the outlook for the US dollar based on the relative strength of the US economy and the likelihood that the Federal Reserve should be the first major central bank to raise interest rates.
What do you anticipate the biggest challenges will be for the fund for the rest of 2015?
While the Greek debt crisis has been much in the headlines recently, the relative strength of the US and UK economies has left open the prospect of interest rate rises by their central banks. While bond investors are right to be weighing up this prospect, the fund’s flexible approach allows the manager to adjust its interest rate risk within a large duration range. At the end of June, for example, the fund’s duration stood at 2.4 years compared to a neutral level of around 6 years. The fund’s flexibility also enables the manager to actively manage its currency positioning to avoid exposures to currencies where the outlook is unfavourable. For example, as the outlook for the euro has faced headwinds from factors such as the Greek debt crisis and the expanded QE activity of the ECB, the manager has significantly reduced the fund’s exposure to the single currency.
What will be the ideal conditions for the fund to prosper in the coming years?
The fund’s flexibility is designed to enable the fund manager to try to deliver performance in a variety of economic conditions. Currently, the fund’s key investment themes include holding significantly short duration, a large allocation to corporate bonds, and a high exposure to the US dollar. The active management of the fund’s duration, credit risk, and currency positioning will continue to drive its performance over the longer term.
Why do you still consider fixed interest to be an important aspect of a diversified portfolio?
A flexible global bond fund can look for the best investment opportunities in fixed interest markets to benefit from the prevailing economic conditions and worldwide trends. Fixed interest securities have the potential to offer a more predictable income for investors than other asset classes, such as equities, and bonds can therefore help to bring an important element of diversification to an investment portfolio. The income generated by fixed interest securities can also help to support an investor’s overall returns if investor sentiment towards equity markets is negative and share prices decline.
In searching for the best opportunities in fixed interest markets, global bond funds may not be restricted to a specific area within the bond markets, but can constantly re-assess relative value within the market, ranging from ‘safe-haven’ government bonds to high-quality corporate bonds. They may also hold securities that are considered to carry more risk, but offer higher income to investors such as high yield bonds and emerging market bonds. The M&G Global Macro Bond Fund is a flexible and diversified global bond fund that can invest in any fixed interest security around the world, as well as in any currency. Currency investing is widely considered a natural extension of global bond investing and offers further diversification benefits for the fund.