The outcome of the November 8 US election caught markets by surprise. After conventional polling metrics had predicted a victory for Democratic candidate Hillary Clinton, Republican Donald Trump unexpectedly secured a majority of Electoral College votes, winning the presidency. Meanwhile, Trump's Republican Party strengthened its majority in both chambers of the U.S. Congress.
The market reaction to the unexpected result was swift, as investors adjusted to the prospect of a Trump presidency. Treasury yields and inflation expectations spiked as investors factored in the prospect of increased tax breaks and infrastructure spending in the United States. Meanwhile, emerging-markets yields rose and most emerging-markets currencies tanked against the U.S. dollar, reflecting concerns that Trump would follow through on his protectionist campaign rhetoric.
Despite the short-term turbulence, Morningstar’s fund research team has not changed any rating for the Morningstar Medallist funds we cover as a result of market events. Our Morningstar Analyst Ratings of Bronze, Silver, and Gold are based on our conviction that quality management teams with strong investment processes can outperform over a long-term horizon.
Still, it’s interesting to look at how a number of positively rated fixed-income funds fared through last month’s turbulence. We recently checked in with three global bond fund managers and two emerging-markets debt fund managers to see how they weathered the storm and how they are positioning their funds following the unexpected political developments.
Managers' Responses Reflect Investing Styles
Bronze-rated PIMCO GIS Global Bond is managed by the firm’s global fixed-income CIO Andrew Balls, and leverages its broad expertise in government debt, credit, and currencies. Though the fund hedges most of its currency exposure back to the U.S. dollar, the portfolio usually includes a few percentage points in off-benchmark currency bets.
Prior to the election, Balls and his team moderated the fund’s exposures to emerging-markets currencies that could be hardest hit by an increase in protectionist trade policies in the U.S., trimming the fund’s small stake in the Mexican peso while increasing its short positions in several Asian currencies with strong trade links to China.
That was not quite enough to offset the fund’s long exposures in the Brazilian and Russian currencies, but the fund’s underweight duration positioning and 7% off-benchmark stake in inflation-linked securities helped it keep pace with its U.S. dollar-hedged peers in November, returning 1.73% for the month in euro terms.
Following the election, Balls has kept those over- and under-weightings in place, while reducing the fund’s stake in French government bonds, arguing that the country with the next high-profile presidential election is likely to generate the most volatility in coming months.
Bronze-rated Loomis Sayles Global Opportunistic Bond, run by long-time managers Kenneth Buntrock, David Rolley, and Lynda Schweitzer, invests across a wide range of market sectors, including investment-grade and high-yield corporate bonds and emerging-markets currencies. After boosting the fund’s exposure to corporate bonds to roughly 40% of assets in the summer of 2016, the team grew increasingly cautious about potential market volatility, in part as a result of the upcoming election, and trimmed that stake to 30% by November, although it still represented an overweighting compared with the 18% stake in the Barclays Global Aggregate benchmark.
Though that overweighting still stung after the election as credit spreads widened, the fund’s preference for sectors expected to benefit from higher interest rates and infrastructure spending, such as financials and capital goods, benefited returns.
Overall, the fund ended the last month down by 79 basis points, roughly even with its peers in the Global Bond Morningstar Category. Looking ahead, the team says it’s hanging on to its credit overweighting, arguing that the new administration’s plans make corporate bonds an attractive market sector, while they’ve also added a 4% stake in inflation-linked bonds in November to benefit from the expected increase in growth.
Templeton Global Bond and Templeton Global Total Return Bond, which sport Silver and Bronze ratings, respectively, are among the most adventuresome global bond funds rated by Morningstar. Lead manager Michael Hasenstab’s hefty off-benchmark currency exposures and at-times substantial stakes in less-liquid issuers can lead the funds’ performance to vary dramatically from their peers. Indeed, the manager’s bet against the Japanese yen, which exceeded minus 40% in both funds coming into November – compared to the JP Morgan Global Government Bond Index which has roughly 20% in long yen exposure, left the funds trailing most category peers through October.
In the fallout from the November 8 election, the dollar surged against both the yen and the euro as U.S. Treasury yields rose. That was good news for the funds, which also sported roughly negative 40% in short euro exposure and finished the month in their category’s top decile. Hasenstab, who invests for a multiyear horizon, kept the portfolios relatively stable in the volatile days following the election. He kept the funds’ large off-benchmark positions in the Mexican peso, at more than 20% in each fund, even as it sold off substantially in November. Despite Trump’s protectionist rhetoric, Hasenstab argues that the Mexican currency remains dramatically undervalued given the country’s growth potential.
