Interactive Investor

Fund Awards 2014: Global Bonds

18th June 2014 16:31

Helen Pridham from interactive investor

Larger fund winner: Legg Mason Brandywine Global Fixed Income

In a market plagued by rock-bottom sovereign bond yields and increasing concerns over rising interest rates in developed markets, the Legg Mason Brandywine Global Fixed Income fund achieved more than double the return of the global bond sector over three years.

This is all the more impressive considering the fund is a sovereign-debt only strategy; however, even a cursory glance over the fund's top holdings suggests that manager David Hoffman is thinking a long way outside the box.

Unlike many of his peers, Hoffman has put faith in sovereign debt from developing markets including Mexico, Poland and South Korea, while going long on 30-year US Treasury bonds as everyone else is cutting duration to the bone.

These bets have clearly paid off, but Hoffman admits that he didn't have an easy time of it. "Convincing clients to follow contrarian positions is sometimes difficult. However, when one feels like all market participants have a different view from yours, that is often when the best investments are made," he says.

Alongside his bullish stance on the US, demonstrated by the fact that 40% of the fund is currently parked in US dollar-denominated bonds, Hoffman says that avoiding Japan has also helped to drive performance over the past three years.

"Avoiding the yen has been our most beneficial trade by far. Structural overvaluation has a way of unwinding in currencies and bond markets," he says.

Hoffman says he is now focusing on southern emerging markets impacted by China concerns through commodity exports - another highly contrarian call. "If long US Treasury rates remain subdued along with rate volatility as we expect, investors will naturally move back into emerging market bonds and currencies without any positive news needed," he concludes.

The fund returned 19.8% in the three years to 1 March, compared to an average of 9.4% for the global bond sector. In the past year its ongoing charges figure was 1.4%.

Smaller fund winner: Marlborough Global Bond

For the third consecutive year, the top accolade in this category goes to the Marlborough Global Bond fund managed by Geoff Hitchin and Nicholas Cooling. Their caution when selecting bonds has clearly paid off.

They are particularly keen to limit the impact of any fall in markets. They have also made the most of the unconstrained nature of the fund to de-risk the portfolio, holding a wide spread of bonds, diversified by geography, credit rating and duration.

When choosing bonds they look for anomalies in the market, finding bonds where the price does not represent what they believe to be the true value. They take a flexible, adaptable approach to identifying the most attractive yields available relative to the risk they are taking. So they avoid taking blanket views on particular regions, and instead focus on individual bonds.

However, they do take into account economic conditions. Hitchin explains: "Taking a global view, rising inflation in a particular country might mean we believe its bonds will do less well, but if that goes hand in hand with rising interest rates there may be an opportunity for us to reap the benefits through forward currency purchases.

"We can then concentrate our bond holdings in currencies where the prospects are for lower inflation and lower interest rates."

Considering the past three years, Hitchin believes the fund's broadly diversified portfolio has served it well. One success story that stands out for him is the decision to back Ireland.

"Irish bonds, which would have been perceived as pretty risky three years ago, have achieved the strongest individual performance, although they remain a relatively small proportion of the overall portfolio," he explains. "We have a Bank of Ireland bond which in 2011 was priced at £65 and is now around £166."

Hitchin thinks interest rates are likely to remain at very low levels for quite some time. He adds: "We also believe that very high levels of debt in many countries could still trigger further problems in the global economy. On that basis we believe a broadly diversified holding in bonds remains an important component of a balanced portfolio."

The fund returned 17.1% in the three years to 1 March, compared to an average of 9.4% for the global bond sector. In the past year its ongoing charges figure was 1.2%.