The new managers of F&C Investments’ Macro Global Bond fund have revisited a stance that dented their predecessors’ performance.
Michiel de Bruin and Steven Bell took on the £123m fund in June this year and have been using derivatives to establish a negative duration position.
The move means that the fund, which invests solely in government bonds, will benefit from a rise in interest rates, something that ordinarily erodes the returns of bonds.
Mr Bell said he expected interest rates to rise in the US at the beginning of next year, meaning he would not have to wait long for the negative duration stance to pay off.
Peter Geikie-Cobb, who ran the fund with colleague Paul Thursby, told Investment Adviser last year that he had taken a negative duration stance in 2011 but that this strategic call initially proved to be a drag for the fund. In the three years to July 2013, the fund lost 2.7 per cent.
“Clearly we did not get instant gratification on our short view,” Mr Geikie-Cobb said at the time. “It took a bit of time for the markets to reassess the yields that are being offered.”
At the time they took over, Mr Bell and Mr de Bruin said they “entirely agree with the philosophy the previous managers used” but warned fund managers had been caught out because they expected US bond yields to rise ahead of any such movement.
The pair have, however, added a dollar/yen call option to provide returns while they wait for their call on rates to come off. The call option has returned almost 1 per cent since July 2, Mr Bell said.
The position allows the fund to make money even when treasury yields fall because it benefits from the dollar strengthening against the yen.
“The yen has weakened and this will continue as the largest Japanese pension fund, the Government Pension Investment Fund, is diversifying its holdings and the Bank of Japan has made clear it is committed to cheapening the currency,” the manager added.
He and Mr de Bruin will be hoping that their call on interest rate rises comes off, as the fund had underperformed when it was run by its previous managers.
In the past five years, the fund has returned 7 per cent, compared with 21.9 per cent from its 50 per cent FTSE All Stock/50 per cent Citigroup WGB combined index, according to the fund’s factsheet.
The fund had made 0.70 per cent in the period from July 1 this year, when the pair took over, to September 2, according to F&C data.
This took the year-to-date performance up to nearly 3.6 per cent.
Elsewhere, Mr Bell said that he expected Italian and Spanish government bonds to continue to rally, potentially to a point where they yield the same as German bunds. Both Spain and Italy make up 5.8 per cent each in the portfolio as at the end of July.
“European bond spreads are narrowing,” he added. “Spanish 10-year bonds are now lower than US 10-year bonds.”
As at last week, Spanish 10-year bonds yielded 2.07 per cent while the US equivalent yielded 2.43 per cent, according to data from the Financial Times.
Italian 10-year debt yielded 2.27 per cent.
“Relative to Germany – they are more than double and the pressures are for the yield curve to narrow,” Mr Bell said.
