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Global bonds: Choose breadth over specialty funds

Scanning the IMA's global bond sector.

Christopher J. Traulsen, CFA 5 March, 2009 | 8:20AM
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As we noted in our last column on global-bond funds, the right currency bets made some global bond managers look like geniuses in the past 12 months, whilst the sector's rambling nature made others appear to be, well . . . something less.

In particular, high-yield funds or funds that maintained high degrees of credit risk were clobbered. Take Andrew Wilmont's Axa Framlington Pan European Bond as an example. The fund lost 31% over the 12 months to 31 January, and this in an environment where the average fund in the sector was up 14.9%. Wilmont recently had a substantial skew towards lower quality credits, and any Sterling exposure would have hurt the fund given the pound's precipitous slide. Paul C

auser and Paul Read's Invesco Perpetual Euro High Yield came in with only a slightly smaller loss, down 29.9% for the period. In this case, it is clear that the constraints under which they operate--maintaining a focus on high yield issues--would necessarily have hurt the fund.

The lesson here is two-fold. First, don't attribute much importance to sector ranks. The sector is so broad that the leaders and laggards tables will often simply reflect the fact that a particular asset class has moved in or out of favour rather than manager skill. Second, we believe investors should beware of chasing funds in this group that did well in the downturn. This is so for several reasons: First, it's almost always a mistake to fight yesterday's battle--indeed the very fact that so many funds with credit risk fared poorly suggests that there may be substantial value to be had in that area, whilst the yields on higher quality securities have been driven down sharply, suggesting further substantial price appreciation isn't in the cards (prices move inversely to yield) and that depreciation could even be in the offing in ensuing years. Moreover, for global funds, note that bond-picking (aside from avoiding defaults) did not matter as much as currency and overall credit quality in the past year. These kinds of macro calls are difficult to get right consistently, and some of the funds on the leaders board over the past 12 months may well have trouble staying there.

We firmly believe that investors too often hurt themselves by trying to make short-term tactical shifts. It's expected to make some moves, but in general, we advocate for well diversified portfolios designed to help investors reach their long-term goals while keeping risk at a level investors can manage. Along those lines, we think many of the funds in this group are just too specialised to be attractive--rather than trying to figure out how much Euro high-yield exposure one should have as a UK investor, for example, we'd advocate allocating a smallish slice of one's portfolio to a manager with a broad global mandate and allowing them to tilt the portfolio towards the most attractive opportunities. One exception might be the handful of emerging-markets bond funds, which can be used in small doses to help diversify a broader portfolio.

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
Rating
Invesco High Yield UK Acc142.73 GBP0.23Rating

About Author

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