The global bond sector has become one of the most popular in recent years and GLG’s global corporate bond offering ranks among the most consistent performers in the market.
Previously known as the SG international bond, the fund changed name and mandate under the GLG acquisition and came under current managers Christophe Akel and Galia Velimukhametova.
They tweaked the portfolio to focus on investment-grade corporate or financial debt from across the world, with up to 10 per cent in emerging markets, as long as the bonds and country are IG-rated by one of the three big agencies.
“We aim to compete with more traditional UK credit funds and see our global mandate as providing several advantages in terms of diversification, liquidity and valuation,” says Akel.
“In general, credit spreads outside the UK tend to be wider due to the larger markets so there are opportunities to outperform with a broader mandate.”
Akel describes the team’s approach as benchmark-aware, not taking any currency risk against the index, for example, although they look to avoid interest-rate risk by using options and futures.
He also stresses the dynamic process, with higher turnover than many of their peers as the managers rarely just clip bond coupons and hold debt until maturity.
“As soon as a bond corrects to what we consider fair value, we tend to sell and move on,” says Akel. “We believe this is the best way to add value in the investment-grade space.”
The global corporate bond outperformed by more than 600 basis points in 2010 with the same volatility as its benchmark, and Akel cites the overweight in subordinated financial debt as key.
Elsewhere, the portfolio’s skew towards the lower end of investment grade – BBB-rated debt – added significant value.
“The regulatory regime is changing with measures such as Basel III, which should be supportive of subordinated debt,” says Akel.
“We believe in an ongoing global growth recovery and lower-rated investment-grade paper will outperform A and AA credits in such an environment. We are also concerned about a pickup in the M&A cycle and feel that focusing on BBB debt serves as a cushion against this. These companies are keen to maintain their investment-grade status and so continue to manage their capital structure cautiously, which is positive for bondholders.”
In contrast, Akel says many A and AA-rated companies are sitting on considerable cash and may therefore prove too aggressive if they feel the road to recovery is anchored.
With so much money flowing into these blue-chip bonds, the team sees little value in their tight spreads – many are trading flat with sovereigns – and is under-weight higher-quality names.
Akel says the major bond theme so far this year is long high-yield credit but adds that lower-quality investment grade is offering better value on a risk-adjusted basis.
After a long period of complacency about low interest rates, he now feels the market has overreacted in the opposite direction and priced in too much rate risk, especially in the UK.
“We are entering a long period of rising base rates but they will not go up in a straight line and we feel the market has rapidly moved to price in too many hikes,” says Akel.
“Inflation is the other big concern, particularly with the problems in the Middle East, and a major oil price spike would hinder ongoing global growth recovery. With that in mind, we tend to invest in companies that can pass price rises to consumers, focusing on price-makers rather than price-takers.”
In terms of geographical exposure, the global corporate bond find is substantially overweight the UK, with its bank bonds cheap compared with European debt and the team happy with current deficit-reducing measures.
Akel is broadly neutral in the US, seeing debt as fair value and citing future concerns if the country’s budget deficit does not begin reducing.
In Europe, he acknowledges ongoing sovereign concerns in peripheral countries but has increased exposure tactically in recent months to take advantage of higher risk premia offered to investors on recently issued bonds.
Akel says: “We are positive on European banks, with huge demand for the recent Credit Suisse Coco issue potentially a game-changer.”