Ollie Smith: Now it's been a difficult year for fixed income investors. There is no doubt about that. But our analyst thinks that flexible bond funds still have something to offer in that backdrop. Giovanni Cafaro joins me now.
Giovanni, can you tell us a little bit more about what flexible bond funds are and what they can offer at the moment?
Giovanni Cafaro: Good morning, Ollie, and thanks for having me today. So, global flexible bond funds can have exposure across different sectors. So, for instance, government bonds and corporate bonds, to name a few, across credit quality, so ranging from investment grade to high yield and geography as well taking also into consideration the currency element here. So, managers of flexible bond funds tend to take a tactical and dynamic approach in adjusting their portfolio characteristics to implement their views. So, perhaps the two most important factors to consider here are credit risk and duration risk, so the portfolio sensitivity to changes in interest rates.
With regards to performance, since the start of the year, the Sterling hedged version of the global flexible bond fund category is down by 14% to the end of last week. And to put that into comparison, global government bonds are down by 13.7%, global corporate bonds are down by 21.6%, and global high yields are down by 14.4%. But perhaps what's most interesting given the macro backdrop is the level of dispersion we've seen within the category in both performance and how these funds are positioned, and that perhaps highlights from an investor perspective the importance of relying on experienced teams and investment processes which have been tested through various economic cycles.
Smith: So, the two funds you want to highlight today specifically – what's the first and what's its strategy?
Cafaro: Sure. So, the first one that I wanted to talk about today is the Janus Henderson Strategic Bond Fund. The strategy is managed by John Pattullo and Jenna Barnard who are co-heads of Janus Henderson Strategic Fixed Income team, and together they've managed the fund since December 2008. The strategy has historically exhibited a bias to credit including high yield, and sector allocation has been the primary performance driver here. The shape of the portfolio is primarily influenced by the managers' assessments of macroeconomic and market factors. However, top-down views are married with security analysis, which is conducted by both the portfolio managers and their credit team.
So, since the start of the year, they moved to a more defensive positioning over the period as the managers expect the global economy to face severe growth scare. And in portfolio terms, this translates into an increased exposure to government bonds from around 10% at the end of last year to 50% as at the end of August as they consider them the best risk/reward option in a severe downturn scenario. And this has come at the expense of their credit allocation with their high yield exposure going down to around 10% at the end of August. Sector-wise, they've maintained a preference for a high-quality, defensive and stable sectors, and they typically favor companies which are large cap, liquid and sort of noncyclical and fit their style over, for instance, certain areas of the fixed income spectrum such as emerging markets, distressed debts or certain sectors such as energy. With regards to duration, they've entered the year with a really short duration at three years, and they've gradually increased it to 8.5 years at the end of August, predominantly through U.S. and Australian interest rate exposures.
Smith: And the second of the two funds, how does that differ strategically?
Cafaro: Sure. So, the second fund is the Jupiter Strategic Bond Fund. The fund is managed by the experienced portfolio manager, Ariel Bezalel, who has been at the helm of the fund since its inception in 2008, and he has more than two decades of portfolio management experience, but he is also supported by Harry Richards, who was promoted to fund manager more recently in 2019.
The fund aims to generate income while also being mindful of capital preservation by employing a so-called barbell approach, balancing the capital preservation features of the higher-quality government bonds with the income generation elements of their high yield debt exposure with some more marginal exposures to investment grade credit and emerging market corporates. So, Bezalel's active and opportunistic approach has added value over time and has resulted in a strong track record.
Since the start of the year, their high yield exposure has modestly increased from 55% to 60% as the managers took advantage of distressed valuations as attractive entry points. However, they've kept a fairly conservative book favoring shorter-dated issues and more defensive sectors. And this move has been underpinned by their belief that current yield and spread levels really represent the generational opportunity for fixed income investors. And from an economic perspective, the growth slowdown suggest that central banks may move to a loser policy should the economy fall into a recession. And also due to these expectations, the portfolio duration has been increased to 7.9 years at the end of August from 4.9 years at the end of last year.
Smith: Brilliant. For more on the global fixed income markets and their reaction to movements in the macroeconomic world, check out any of our international websites, including Morningstar.co.uk. Until next time, my thanks to Giovanni, I've been Ollie Smith for Morningstar.
