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What is Driving Bond Fund Returns?

Bond fund managers have sought opportunities in market volatility this year. We look at the tailwinds for the sector, and reveal the biggest and best fixed income funds

Ashis Dash 31 October, 2017 | 10:08AM

The global flexible bond Morningstar Category has returned 7.89% year to date. This makes it one of the better performing fixed income categories, during a challenging environment.

While global bond markets experienced several episodes of volatility so far in 2017, arising from a range of factors from politics to central bank actions, these dislocations also provided investment opportunities. As confidence around the reflation trade, that had been reinforced from expectations of expansionary polices from the new US administration, started to unwind in early 2017, concerns around populist parties gathering momentum in Netherlands and France took hold of the markets.

The rejection of the populist candidate in Netherlands around mid-March was positive for the European markets.

Going forward, politics and central banks stepping back from years of monetary easing could create additional opportunities for active managers to add value across the global bond markets. Global flexible bonds that can dynamically allocate across these, can be a valuable tool.

However, we would emphasise the importance of understanding a fund’s objective and its inherent biases to judge its suitability. It’s also critical to keep a close eye on fees, as excessive pricing is likely to significantly impair a fund’s potential for future outperformance.

Most Popular Funds by Size

Both funds highlighted below have grown significantly in assets over 2016 and YTD 2017.

Dan Ivascyn and Alfred Murata have managed PIMCO GIS Income since its inception in late 2012 with Ivascyn having managed its US-domiciled counterpart since 2007. Like all of PIMCO's funds, it relies on numerous top-down and bottom-up calls. Its income focus has led to significant weightings in higher-income areas, such as high-yield corporates.

It has also for years had a strong taste for nonagency mortgages compared with most other global flexible bond funds. The fund’s returns rank at the top of the global flexible bond–USD hedged Morningstar Category, with below-average volatility since its 2012 inception. It holds a Morningstar Analyst Rating of Silver.

Jupiter Dynamic Bond, with a Morningstar Analyst Rating of Silver, has been managed by Ariel Bezalel since its inception in mid-2012. He combines his top-down macroeconomic views with rigorous bottom-up security selection from Jupiter’s credit analyst team.

The portfolio is constructed taking a barbell approach balancing the capital preservation features of high-quality government bonds and the income-generation of high-yield debt (including subordinated financials). Bezalel’s active management of these exposures as well as duration has led to strong absolute- and risk-adjusted returns over the years. 

Top Performing Funds

Eve Tournier has been a named manager on PIMCO GIS Diversified Income since 2010. PIMCO also added group CIO Dan Ivascyn and mortgage specialist Alfred Murata in May 2016 when they announced manager Curtis Mewbourne’s September 2016 retirement.

The strategy centres around diversified global credit exposure spanning investment-grade, high-yield, and emerging-markets sovereign and corporate debt, and is supplemented by noncore credit sectors, including convertibles, bank loans, municipal loans, and securitised debt. The fund has proved more volatile than its average peer in the past few years, but its overall performance has been strong, boasting top-notch returns. The fund holds a Morningstar Analyst Rating of Silver.

Man GLG Flexible Bond, with a Morningstar Analyst Rating of Bronze, has been managed by Jon Mawby since its January 2013 inception. His diverse fixed-income experience is complemented by Andy Li’s, who joined as a comanager in May 2014, derivatives-focused expertise. The managers dynamically move the fund’s duration and asset allocation across global fixed-income markets based on their top-down and bottom-up views.

Furthermore, their value-driven approach can lead to large, high-conviction bets, such as close to 60% exposure to financials in mid-2017 which has been the key driver of the fund’s strong performance through the first nine months of 2017 after a weak 2015-2016.

A version of this article appeared in International Adviser magazine

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Jupiter Dynamic Bond I EUR Acc13.05 EUR0.50
Man GLG Flexible Bond I H USD Acc125.08 USD0.30
PIMCO GIS Diversified Inc R Inc USD10.30 USD0.22
PIMCO GIS Income R Inc GBP H11.44 GBP0.00
About Author

Ashis Dash  is a Morningstar Fund Analyst