Bond funds suffered from numerous headwinds in what was an eventful and volatile first half of the year and summer. Most risk asset returns had a strong January, continuing the trend seen over 2017, but sharply reversed as February reintroduced volatility to financial markets amid concerns about rising inflation.
A strengthening U.S. economy gave the Federal Reserve the confidence to raise interest rates again in June and signal two further rate hikes, followed by three more in 2019. On the contrary, a string of disappointing macroeconomic data has pushed any potential rate hike in the eurozone until mid-2019, according to the ECB.
The bank did mention that its quantitative easing programme will conclude by the end of the year. Geopolitical turmoil, sustained trade war fears and broad U.S. dollar strength characterised much of the period, pushing down bond prices across the board, except for U.S. and Sterling High Yield.
Emerging market volatility has taken centre stage this summer, led by the Turkish economy. The Turkish lira rapidly depreciated, losing more than a third of its value against the U.S. Dollar so far this year. This was largely due to the US government’s imposition of higher tariffs as a result of the ongoing feud over the detention of an American pastor, coupled with market concerns on President Recep Tayyip Erdogan’s influence over monetary policy.
Funds to Watch – Largest Funds
PIMCO GIS Income, with a Morningstar Analyst Rating of Silver, remains the largest fund in the Global Flexible category. In the second quarter of the year, the fund posted its first quarter of outflows after having grown at an astonishing rate since 2016. As of March 2018, co-managers Dan Ivascyn and Alfred Murata managed $212 billion across several vehicles in this strategy.
They make effective use of PIMCO’s large analytical resources, including a very large group of mortgage and real estate specialists.
The evidence is long-term returns near the top of the global flexible bond USD hedged Morningstar Category and below-average volatility. It has leaned on several areas, including exposure to falling global government yields and corporates, but the fund's nonagency residential mortgages have also been a cornerstone of its performance. That's raised some concerns, as the nonagency RMBS market has been shrinking in size at the same time as the fund has grown, but PIMCO has a broad enough opportunity set to also add value elsewhere.
BGF Fixed Income Global Opportunities stands out among its peers following a disciplined and risk-focused process. It holds a Morningstar Analyst Rating of Silver. The fund spreads risk across sectors, regions, and issuers and emphasises taking many small bets rather than fewer large ones.
The four-person management team led by Rick Rieder has used the fund’s flexibility to its advantage across a variety of market environments, including both weak and strong credit markets as well as periods of rising and falling interest rates. Rieder and his team aim to generate returns uncorrelated with the broad bond market while producing strong absolute and risk-adjusted performance. The fund has largely met these goals.
Funds to Watch – Best Performing
PIMCO GIS Diversified Income fund has produced exceptional returns for investors over the past three years. The fund holds a Morningstar Analyst Rating of Silver. This fund is designed to deliver PIMCO’s best ideas for global credit exposure using the firm’s strong management resources, research, and process. Long-time manager Curtis Mewbourne retired in September 2016 and PIMCO CIO Dan Ivascyn and mortgage specialist Alfred Murata were added to the manager line-up.
Eve Tournier had already been named a comanager of this fund since 2010, while Sonali Pier was added in February 2017. They manage a credit-heavy portfolio invested across a combination of investment-grade corporates, high-yield corporates, and emerging-markets corporate and sovereign debt. Asset allocation and sector rotation are expected to be the key alpha drivers.
Muzinich Global Tactical Credit, with a Morningstar Analyst Rating of Bronze, has delivered solid returns over the past three years through sector rotation and strong security selection. Lead manager Michael McEachern has steered this fund since inception in 2013 and boasts more than two decades’ experience in the credit markets. He is supported by a team of four specialist portfolio managers and by a growing 23-member credit research team. The strategy’s opportunity set consists of U.S., European, and emerging-markets investment grade and high-yield corporate credit.
The manager relies on the firm’s weekly asset-allocation group for formulating top-down views. This forum assesses the macro environment and the state of credit markets, looking at fundamentals, valuations and technical across regions. Positions are sized according to the analysts’ assessment of their relative attractiveness and contribution to portfolio risk.
A version of this article first appeared in International Adviser magazine
