This fund was launched in 2012 as a “true global bond fund”, according to manager David Arnaud. Now £135m in size, its objective is income with the potential for long-term capital growth. He says: “The way we positioned that fund in the global bonds peer group is giving a true fixed income exposure to customers using developed-world markets, mostly investment grade.”
Mr Arnaud explains that investors in this fund are getting three types of exposure: to interest rates; to credit or credit risk; and to currencies.
“First, we use the Citi World Government Bond index – a benchmark made up of just government bonds – as a starting point for the currency allocation,” he reveals. “The neutral point is just replicating that index. That index broadly has 30 per cent in US dollar, 30 per cent in Japanese yen and 30 per cent in euro; so the first decision we make is currency allocation.”
He has regular discussions about currency with other fixed income managers at the firm.
“The second decision process that I make is managing the interest rate risk, or duration positioning,” he continues. He uses a variety of sources, such as in-house rate and inflation forecasts, to come to a macroeconomic view. “Once I have a macro view, I make my call on duration,” he notes. “That call is made for every currency the fund invests in. So, I have my currency allocation and my duration positioning; the last call is: ‘Do I want to buy government bonds, or corporates?’”
Twice-weekly meetings with Canada Life’s in-house credit analysts help Mr Arnaud make a call between credit and government bonds. “These are the three layers of decisions. And once you have those layers, you have a shortlist of assets to buy. Then we run through the valuation calls, and that decision forms a buy decision.”
The manager has made a number of changes in the portfolio recently, including building up the amount of corporate bonds in the fund, starting 18 months ago having identified more value in credit. He admits though: “Looking back, I think we made that call a bit too early because corporate spreads suffered last year. But this call has been the right one so far this year.
“Another big adjustment is a year ago we were overweight the US dollar and underweight the Japanese yen. The idea was that Japan was doing a lot of QE, we were actually positioned for an increase in US rates. So, over the past 12 months, we reduced that dollar overweight and we’ve also cut the yen underweight, so we’ve moved that currency to a more neutral position.”
Now, Mr Arnaud is keeping a large amount of cash in the portfolio, “the idea being to have that cash available for when yields start rising because this is still what we think is going to happen”.
The fund sits firmly in the middle of the risk-reward scale at level four, while ongoing charges of 0.84 per cent apply to the clean retail C accumulation share class.
| EXPERT VIEW - Jon Beckett, consulting CIO and financial author |
| The fund has had a difficult three years; the past few months playing back in favour of Mr Arnaud’s quality government and corporate bond approach. The portfolio has a lot of Japanese government bonds, with about 20 per cent exposure to Japan. The largest regional bet is Europe at 35 per cent, followed by the US, and the UK only makes up 13 per cent, which will be of interest to asset allocators. Investors are buying into Mr Arnaud’s macro process, as he takes views on global growth, inflation and interest rates. On past performance, many buyers may overlook it but, if the past six months point to the next credit cycle, then the fund looks more interesting; especially if you want a fund with a less-vanilla country allocation and one that is nimble enough to traverse illiquid markets. |
According to FE Analytics, over three years to April 12 2016 the fund has returned 7.4 per cent to investors, while the index is up 7.2 per cent and the peer group lags, generating a 3.9 per cent return on average. The data shows the fund has fallen behind its benchmark, the Citi World Government Bond index, in the year to April 12 2016 with the fund delivering 3.6 per cent compared to the index’s 9.4 per cent gain. But it was in line with the IA Global Bonds sector average return of 3.1 per c ent over that period.
The portfolio’s three main exposures – currency, interest rates and credit – are its three main sources of return, says the manager. He points out that performance has been helped in the past year by sterling weakness. He elaborates: “Pound sterling looks weak, meaning other currencies have appreciated against sterling. The Japanese yen is up by 14 per cent year-to-date, so everything you invest in Japanese yen and convert back into sterling you get 14 per cent as a starting point, so that currency movement has been very helpful in the past quarter.”
Mr Arnaud notes the fund has benefited from falling rates, although running a short duration positioning in the portfolio means “we benefit from the falling yield but not as much as we should or could have”. He adds: “Credit has recently been detrimental to performance because credit spreads were under pressure at the start of the year.”
