Ollie Smith: We're back with another snapshot look at the funds piquing the interests of our fund research team. Giovanni Cafaro joins me to discuss three fixed income strategies that are lighting up the dashboard at Morningstar's London office. Giovanni, thanks so much for your time. What's fund number one today?
Giovanni Cafaro: Good to be here. So the first fund I wanted to talk about is the BlueBay Investment Grade Euro Government Bond fund. The fund's currently managed by Mark Dowding, who is chief investment officer at BlueBay, and has run the fund for more than a decade since its inception, and Kasper Hense, who is co-lead for this strategy. So, this really combines Dowding's extensive experience in the sovereign market with Hense's expertise on the rate market side. The managers also really benefit from a stable and experienced (wider) team to take a very active approach and meet a relatively ambitious outperformance target.
So over his tenure, Dowding has certainly demonstrated the ability to use its risk budget effectively, and navigate a series of different market environments. So in portfolio terms, this means that the fund would typically show a relatively higher exposure to non-core countries, such as those clusters, peripherals or emerging markets. So the process has evolved, but remained largely unchanged over time with a focus on bottom up fundamental research, leveraging BlueBay's own proprietary tool and assessing fundamentals, valuations and technical factors for each issuers. So the approach has helped generate a strong track record. But what's remarkable about this is that the managers have done so while keeping risk measures contained and low tracking error, resulting in a very competitive risk return profile. So overall this earns the fund clean share class and Morningstar analyst rating of Silver, while more expensive share classes, earn Bronze and Neutral ratings.
OS: Okay. Next up we're going to Fidelity, aren't we? What's going on over there?
GC: So the second fund I want to talk about is the Fidelity Strategic Bond fund. Tim Foster and Claudio Ferrarese are the Co-PMs on this strategy. The team saw veteran fund manager Ian Spreadbury retire in 2018. Having built and led Fidelity's fixed income team since 1995. The two co-managers share a long history of working at Fidelity and have now reached the three-year mark at the helm of the fund. And it's fair to say they've provided a good degree of continuity, delivering good performance over the last three years. It's worth mentioning they also benefit from a well-resourced team, which includes credit analysts, traders, as well as quantitative analysts aiming to generate an attractive level of income, while also limiting the correlation to the equity markets.
The fund follows an unconstrained approach, starting from their characteristic strategic asset allocation, taking a flexible approach and building on top of that, to leverage – credit selection and asset allocation is the two key performance drivers. Historically, the approach has resulted in a higher level of volatility compared to peers. But that's been well compensated by excess returns, resulting in an attractive risk adjusted profile compared to peers. So an example of where this active approach has been successful, is 2020. When the fund came into the year, defensively positioned with 35% of the portfolio invested in government bond funds, and this really helped the strategy weather the sell off and save about 2.5 percentage points on the downside compared to sector average. So our conviction in the fund leads to the clean share class, obtaining a Morningstar analyst rating of Bronze, while more expensive share classes get a Neutral rating.
OS: Brilliant. And then, finally, we're going on to BGF Fixed Income Global Opportunities, aren't we?
GC: Sure. So, Rick Rieder and Bob Miller have run this fund together since 2011. And have decades of experience between them and strong track records across several mandates. They're joined by Aidan Doyle, as named PM on the (indiscernible) vehicle since 2020. So, Rieder and Miller head up a team of seasoned specialists and in addition to this, they also tap into their deep experience in global research team of more than 500 investment professionals at BlackRock. So access to such level of resources is ultimately very important because security selection is outsourced to the sector specialist teams, and the depth and experience of those teams is what ultimately determines the quality of the selection.
The investment philosophy has been time-tested, in other funds that are managed by Rieder and the global fixed income platform at BlackRock. The mandate is rather flexible, but still very structured with risk frameworks in place. In particular, we see the team's willingness to hedge risks regularly as a strong positive, especially so in a category of risk takers. And on the other end, the unconstrained approach the fund takes means the investable universe is wide ranging, and the team chooses from a long menu of options that includes MBS, ABS, high yield bonds, emerging market bonds, currencies and derivatives. Something perhaps that's particularly relevant for the current macro backdrop is that the fund has performed well in various rate environments by using its duration flexibility to benefit both from rising and falling rates, while many peers have been unable to do so.
Examples of market environments in which the fund has done well are the taper tantrum, the EM sell off in 2011, the high yield sell off in 2015, 2016, and the more recent Covid-19 sell off in 2020. Therefore, we continue to think highly of this strategy which obtains a Morningstar analyst rating of Gold.
OS: Fantastic. For more on manager research and fund ratings, check out our weekly Tuesday updates on Morningstar.co.uk. Until next time, my thanks to Giovanni. I've been Ollie Smith for Morningstar.
