This week we painted an ugly picture for bonds in our teleconference. One listener asked “do you personally hold any bond funds?”.
The teleconference this week
highlighted some ugly facts about the debt and bond markets. Not because many of you have much in bond funds, but because, as we learnt in 2008, the contagion from bond markets can be extreme. And in key respects the bond market is in much worse shape now than in 2008.
Nonetheless the world of bonds has many dimensions, and fund managers have a range of ways in which they can exploit markets, even troubled markets. I don’t personally hold any bond funds. But many of our advisory clients are long term holders of the M&G Global Macro BondAnalysis Save to my funds Add to basket
fund. Here are some charts to illustrate the key issues.
The first chart below shows the M&G fund over the last 10 years versus the FTSE 100 index. You can see that M&G has done rather well (up 99%), and with a lot less volatility. For example the worst month was down -4.2%, whereas the worst month for the FTSE 100 was -12.86%.
How does it do it? First and foremost it is a very actively managed fund (no closet tracking here) and the investment team is hugely experienced, led by the insightful Jim Leaviss.
They have a very flexible mandate, across the range of global bonds (e.g. government, corporate, high yield, emerging market) and, crucially, currencies.
This means they can position the bonds in their portfolio to be very low risk (by managing what is called duration*), while taking very active positions on certain currencies – limit risk in one area, but actively take it on in another.
This is illustrated in the second chart. It shows two things. Firstly this fund against its peers over 10 years – most global bond funds are not terribly active, nor skilfully take advantage of the bond/currency angles in the way in which this M&G fund does – and that shows here.
It also shows the fund performance against the US dollar. The dollar has helpfully trended upwards, but the M&G fund has done even more so, skilfully playing the dollar trend, but also opportunities in other parts of the globe, in currencies and bonds.
This is a fund which does something different where you have a portfolio that is otherwise dominated by equities, and where bonds either seem too esoteric or too risky. It will tend to be a long term holding, though it still needs a stop-loss, so you sell quickly if the fund gets into trouble.
As with any fund, it will not make straight line progress. But it is has been an effective diversifier against stock market holdings over the last 10 years. In fact when it drifted off through 2017, the stock market portions of portfolios were making handsome gains – when roles are reversed, M&G has been an effective portfolio stabiliser.
2018 and the outlook
It has turned up again from April 2018, mostly assisted by the dollar (and despite exposure to emerging market bonds and currencies).
You know from the teleconference that a number of indicators suggest the US dollar rally of 2018 is about to run out of steam. But this seems most likely to be an interruption in a dollar uptrend which will continue later in 2018, and beyond.
You can try and time the latter, but that is not always easy unless you are paying close attention to the market. As a minimum this fund should be on your “buy list” as a longer term hold.
* In an era of rising interest rates the “duration” of a bond fund will be an important consideration. In simple terms, the longer the duration of a bond fund (measured in years) the more at risk it is to rising interest rates.