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Currency exposures boost global bond funds

Some funds up more than 50% in past year, but are they good investments?

Christopher J. Traulsen, CFA 17 February, 2009 | 10:02AM
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In the IMA Global Bond sector one finds not only global bond funds, but also European bond funds, Asia bond funds, emerging-markets bond funds, and high-yield funds. Given the breadth of the sector, then, peer rankings are not all that meaningful. Indeed, the breadth of strategies in the group has been on full display over the 12 months to 31 January. Returns in the period ranged from a staggering 56% return from SWIP Global Bond Plus at the top end, to a 33% loss from the apparently ironically named UBS Absolute Return Bond at the low end. (Indeed, "absolute return" is nothing more than an aim, and labelling a f

und such is disingenuous in my view. No one can claim to deliver positive returns in all environments).

The disparity in returns reflects clearly the key performance drivers during the period. More specifically, being long duration helped, as interest rates fell (duration is a measure of the sensitivity of a bond's price to fluctuations in interest rates) while favouring higher quality credits over lower-quality fare also proved a smart bet. The most important factor, however, was currency: The US dollar appreciated 39% versus the Pound, the Euro appreciated 21% versus the Pound, and the Yen rocketed 66% versus the Pound. In other words, a fund manager could have invested in a cash account in Yen, and gained 66% in the period. Security selection, then, was not a major issue and top-down calls ruled the day.

The SWIP Global Bond Plus offering is a key case in point. Manager Guy Skinner, who took the helm in early 2008, had substantial exposure to dollar, yen, and euro assets (81% of the fund's assets were in those three currencies at last count). He also kept the fund in government bonds, as has historically been the case at the offering. In short, for sterling investors, the fund was in the market's sweet spot. While impressive, we'd caution against attaching too much significance to that performance. The fund has been through a few managers in recent years, and needs to show more consistency through time to deserve serious consideration in our view.

An offering with somewhat more to recommend it in our view is Jim Leaviss's M&G International Sovereign Bond. Though he hasn't been at the helm here long--he took over following the December departure of David Knee--Leaviss is a veteran manager and M&G is a group which has offered more continuity than SWIP in the recent past. We also like this fund's mandate, which keeps it out of gilts. M&G tried to change it about a year ago when Sterling was riding high, but we're glad the move failed. It makes the fund a strong diversifying "bolt-on" for portfolios that already have gilt exposure.

We'd also note that there are a large number of funds in this category charging more than 1.50% in annual TER. Paying that much for a bond fund is just foolish in our view--we'd stick to funds with TERs of 1.25% or below for vanilla global exposure.

A version of this article previously appeared in Investment Adviser, Financial Times Ltd.

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
M&G Global Government Bond GBP A Acc141.66 GBP0.12Rating

About Author

Christopher J. Traulsen, CFA  is director of fund research, Europe and Asia, Morningstar.