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Sector Focus: Europe has been the driver for global bond performance

Concerns over emerging markets have held back the performance of many global bond funds, with the best returns coming from funds specialising in European  high yeild, reports James Smith.


Global bond remains among the broadest IMA sectors, with a range of non-sterling fixed income strategies lumped together in a single peer group.

While proving popular in sales terms over recent years, as bond investors looked to expand their horizons in search of returns, the sector has actually underperformed its sterling counterparts over three years to mid-August. Global bond funds have returned an average of 13 per cent compared with 18 per cent from Uk corporate bond funds and 23 per cent from high-yield sterling paper. The global bond sector has taken some damage from its emerging market debt components, particularly hard hit in the recent selloff.

Of course, despite a lower average, global bonds contains several top performers – beating the best the sterling sectors can offer – largely in the European high-yield space.

M&G European High Yield Bond is top of the pile in this sub-sector over one and three years, with manager James Tomlins among many looking to take advantage of more attractive valuations post the recent sell-off.
Short-term, he noted the fund fell in June due to its significant allocation to B-rated names, as high yield underperformed investment grade.

He says: “Credit spreads widened meaningfully over June, although we do does not believe this was warranted by any real change in fundamentals and believe the corporate environment remains favourable.

“For us, high-yield bonds are once again offering attractive value following the recent sell-off and we took the opportunity to add a small amount of credit risk and increase duration from 2.7 to 3.2 years, around a neutral position.”

His focus continues to be on B-rated names, with the manager citing their relatively low sensitivity to movements in interest rates and superior risk/reward characteristics.

Over the last month, Tomlins participated in a number of new deals, including issuances from global power generator Intergen, Icelandic food manufacturer Bakkavör and The AA. Within the cable sector, he purchased hybrid debt issued by Dutch telecom KPN although sold Kabel Deutschland following strong performance and confirmation of its acquisition by Vodafone.

Just behind M&G over three years is the much lower-profile Brookfield Investment Management with its High Yield Europe Plus portfolios, with MD Curt Schibli
 highlighting a focus on higher credit quality.

With a modestly more defensive position, the fund has lagged over the shorter term however, as indicated by less impressive one-year numbers.

Schibli says company results appear generally in line with expectations for the fourth quarter of 2012 but with a general tone of weakness in peripheral countries as opposed to more positive figures in the core.

He says: “Companies, both multi-nationals and those more European centred, are continuing to see sluggish conditions in the southern periphery markets.

“Liquidity, primarily in the form of easy central bank policy, and low volatility have been underpinning the market for some time, offsetting some of the effects of a sluggish economy on company credit fundamentals. But the recent change in interest rate expectations in the US, caused in part by better economic data there, has introduced an element of uncertainty to European high yield.

“However, the ECB has voiced its concern about the sluggish flow of money to the private sector and remains ready to increase its liquidity action, in contrast to the potential tightening in the US.”

With leading indicators in Europe stabilising and potential for improved growth in the US, he believes high yield may actually benefit and see issuer fundamentals improve.

“As such, volatility in the market, during a period where the market gets used to less global liquidity yet better economic prospects, may provide some attractive opportunities,” adds Schibli.

Rounding out the top European high-yield offerings is Threadneedle’s fund run by Michael Poole, who once again expects fundamentals to remain supportive and default rates low.

Looking at last year, he says the spike in risk appetite in the final quarter saw the fund benefit from being overweight BB-rated and underweight B-rated names and from its focus on companies with an international rather than purely European focus.

Poole says: “This stance reflected the problems that continue to weigh on eurozone economies, which are particularly acute in the automotive sector, suffering from depressed domestic demand.

“Looking forward, it is clear interest rates are likely to remain low as central banks seek to prop up consumer demand given there is little scope for fiscal stimulus in the developed world. Demand for income and higher-yielding assets should, therefore, remain robust.”

A number of global funds also feature among the sector’s top names over three years, with Legg Mason Western Global High Yield employing a wider universe to find opportunities in this part of the market.

According to the Western team, the global high-yield market rebounded from its sell off July, with the Fed’s confirmation that it remains committed to accommodative policies calming investors.

After a two-month breather, investors returned to risk-taking and spreads retraced part of the widening experienced over that period.
Ratings positioning was key in this rebounding market, with the fund’s overweight to CCCs, the best-performing quality bucket over the month, and underweight to BBs, the worst-performing, boosting returns.

Templeton’s Global Total Return fund, run by Michael Hasenstab, is the broadest mandate among the top performers, with the manager another seeing recent volatility as short term and therefore a buying opportunity.

Again, the fund underperformed amid the mid-year volatility, with credit exposure neutral and currency positions in Asia ex-Japan and Latin America doing most of the damage.

Hasenstab says: “We continue to anchor our long-term views on fundamental analysis and seek to take advantage of opportunities as they arise. We see the unorthodox policies in some major advanced countries as having potentially serious long-term consequences, including asset price bubbles and upward surges in commodity prices. We have continued to position ourselves to manage the interest rate risks we expect from the combination of historically low rates and easy monetary policy in the G-3, rising price pressures emanating from China and global demand we believe is far from collapsing.

“We generally maintain an extremely short duration within our strategies, while seeking to take advantage of what we deem the relative attractiveness of currencies of countries with fundamentals likely to support medium-term growth.”

Best and worst performing global bond funds to 30 August 2013
Best and worst performing global bond funds over three years  
Top 5  
Hermes Global High Yield Bond 35.6
Aberdeen Global Select High Yield Bond 35.3
M&G European High Yield Bond 31.8
Brookfield High Yield Europe Plus 29.5
Aberdeen Global Select Euro High Yield Bond 28.7
Bottom 5  
MFS Meridian Emerging Markets Debt Local Currency -3.9
City Financial Strategic Global Bond -3.4
Threadneedle Global Bond -2
Baring Emerging Markets Debt Local Currency -1.8
Henderson Inst Overseas Bond -1.2
Sector average 9.3
Figures are for total returns for the three years to 30/08/13 on a bid to bid price, with net income reinvested.  
Source: FE Trustnet


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