2015 Fund Awards: Global Bond

Best larger fund

Legg Mason Brandywine Global Fixed Income

Global bond funds have become increasingly popular in recent years as investors have looked further afield for returns and diversification. Our larger fund award in this category goes to Legg Mason, a global company with specialist fund managers around the world.

Legg Mason Brandywine Global Fixed Income is run by Brandywine, which specialises in fixed income investment. David Hoffman, co-lead portfolio manager, explains that its approach is to seek out value in global bonds, taking economic trends into account.

'The fund is primarily invested in higher-yielding government debt and currencies of developed and higher-quality developing countries.

Its portfolio is constructed in an unconstrained, diversified way. Hoffman says: "We prefer a benchmark-agnostic approach for building bond portfolios, concentrating investment across the dozen countries and currencies with the most attractive valuations given our outlook for macro change.

"We attempt to express multiple, un-correlated active value themes in our portfolios, so that investors benefit from higher yields while curbing portfolio volatility."

Taking a view on global economic developments is an important part of the approach. Hoffman explains: "Macroeconomic conditions play a significant role in creating value in bonds and currencies. Of the attractively valued bonds and currencies in our universe, we only choose to own those that align with our outlook for macroeconomic change in the coming year to 18 months."

He says that the managers' best decisions over the past three years include avoiding the euro, which was challenging when valuations increased in mid-2014 but ultimately paid off, and avoiding the yen. Hoffman adds that increasing holdings of longer duration, more interest rate-sensitive US bonds to the portfolio in 2014 was another important success story.

The managers expect that improved global growth and reduced quantitative easing will help to normalise investment conditions in the coming years. But, although this means there will be less scope for gains in the developed world, Hoffman says it will be offset by the opportunities available in relatively high-yielding emerging market government bonds and currencies.

The 'A Hedged' share class was monitored for this award, with a three-year return of 26.07%.

Best smaller fund

Marlborough Global Bond

The winner in this category is a Money Observer award record holder, having won this award for the fourth consecutive year. Marlborough Global Bond is run by Geoff Hitchin and Nicholas Cooling. Their investment approach sounds deceptively simple.

Hitchin explains: "We take a flexible approach to identifying the most attractive yields available relative to the risk we're taking and we hold a diversified portfolio. We currently have more than 300 positions, which is more than most comparable funds."'

The portfolio contains a balance of lower-risk, but longer-dated, bonds and those that are a little further up the risk ladder but shorter dated. "The aim is to generate an attractive yield, while limiting risk and volatility," says Hitchin. When choosing individual bonds, the managers look for a mismatch between price and value that has not yet been identified by the wider market.

The fund doesn't have any fixed weightings to regions, countries or industry sectors. The managers believe flexibility is one of its key strengths, and they will always maintain a good balanced spread. That said, the majority of the bonds in the portfolio are in the US, the UK and Europe - and the US dollar, sterling and the euro represent most of the currency exposure.

However, Hitchin says that a key decision that served the fund well over the past three years was to have little or no net exposure to the euro.

He concedes that the future may be tougher. He says: "Bond markets have become more volatile. There are various reasons behind this volatility. Quantitative easing is pumping more money into the system and new financial regulations mean banks have to hold more bonds on their balance sheets, which means there are fewer to trade on the open market.

"All this contributes to sharper price movements and that means a diversified portfolio, with a balance of bonds of different risk profiles, is more important than ever."

The 'A' share class was monitored for this award, with a three-year return of 19.45%. On Interactive Investor the 'P' share class is available, which returned 21.74%.