Funds in the Global Bond and Global Corporate Morningstar Categories suffered from numerous headwinds in what was an eventful and volatile first half of the year, with the average fund losing 2.5% and 3.4%, respectively.
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, and thus rates.
The Federal Reserve raised rates two times in the first half of 2018 and has signalled two further hikes to come this year, as inflation reached their target faster than previously forecasted and unemployment continued to fall.
In Europe, the European Central Bank announced in June that the QE program will be phased out by the end of the year, but the forward guidance on rates was perceived as dovish by the market as Mr. Draghi also announced that interest rates will remain unchanged at least through the summer of 2019.
Political turmoil and global trade tensions also took centre stage through the period, casting fears of slowing global trade. A resurgent U.S. Dollar during the second quarter of 2018, along with rising oil prices and interest rates, spurred emerging market volatility - led by Argentina and Turkey.
Overall, government bond returns were broadly flat over the first half of the year, except in Italy where a surprise collapse of coalition talks drove a dramatic selloff in Italian government bonds. On the credit side, spreads widened across the board, but most notably in the investment grade market.
Funds to Watch – Largest Funds
Templeton Global Bond and Templeton Global Total Return, with Morningstar Analyst Ratings of Silver and Bronze respectively, remain the largest funds in the Global Bond space, despite suffering considerable outflows since hitting peak assets around mid-2013. Both strategies are co-managed by Michael Hasenstab and Sonal Desai using an identical investment approach. The main difference is that Templeton Global Total Return fund takes on more credit risk than its government-only sibling Templeton Global Bond.
The managers aim to identify value among currencies, sovereign credit, and interest rates, attempting to find those opportunities early on and watch them play out over several years. For years, lead manager Hasenstab has mostly avoided low-yielding debt of the United States, eurozone, and Japan, which dominate most peers’ portfolios.
Instead, he has preferred emerging-markets bonds and currencies. The funds also stand out for its long-time bets against the euro and yen. The contrarian-minded group have suffered some periods of underperformance, but over time, long-term-focused investors have been amply rewarded.
PIMCO GIS Global Bond is another fund that has consistently featured among the largest funds in the global bond space. It holds a Morningstar Analyst Rating of Bronze. It has been co-managed by Andrew Balls, Sachin Gupta and Lorenzo Pagani since September 2014. In contrast to Templeton’s positioning, the largest allocations here are typically government debt from the United States and eurozone.
Nevertheless, the fund’s sector and regional weights can shift significantly over short periods. The strategy allows for considerable flexibility, including investments in corporate and securitised credit and emerging-markets-debt, which the team has historically used to good effect.
Funds to Watch – Best Performing
PIMCO GIS Global Investment Grade Credit fund has produced exceptional returns for investors over the past three years. Two-decade PIMCO veteran Mark Kiesel has run this fund since its 2012 inception and the US-domiciled version since 2002. He draws on the firm’s myriad resources for ideas and follows a multifaceted approach.
The thoughtful macroeconomic analysis that takes place at PIMCO’s forums gets translated into guidance by the firm's Investment Committee. Those views inform the fund's overall risk level, interest-rate positioning, and off-benchmark exposures.
The solid bottom-up fundamental work performed by the team's 50-plus credit analysts, combined with the 20-plus corporate portfolio managers taking the market's pulse, drive the fund's credit selection. The fund holds a Morningstar Analyst Rating of Silver.
Robeco Global Credits, with a Morningstar Analyst Rating of Silver, has delivered solid returns over the past three years through strong credit selection and, to a lesser extent, through beta positioning. Lead manager Victor Verberk has steered the fund since inception in 2014 and is supported by two comanagers, with whom he forms a close-knit and experienced credit team.
They are further supported by Robeco’s 19-strong experienced credit team, that covers both investment grade and high yield bonds. The process combines top-down beta positioning and bottom-up security selection, with an emphasis on the latter. This high-conviction process gives the managers sufficient leeway to add value against the benchmark and peers.
A version of this article appeared in International Adviser magazine in June
