Fixed Income  

Strong sterling causes M&G government bond fund losses

M&G Investments’ Mike Riddell has blamed the strength of sterling for the heavy losses suffered by his £50.7m International Sovereign Bond fund in 2013.

In a difficult year for fixed income the product lost 9.6 per cent, one of the worst returns in the IMA Global Bonds sector, according to FE Analytics.

Mr Riddell said: “For any global government bond fund the driver is going to be currency. If sterling is strong, other currencies are going to be weak. This fund doesn’t invest in sterling and that accounts for most of the losses.”

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The 2013 performance comes in spite of the M&G bond team making a well-timed call to ‘short’ 10-year US government bonds, a position that benefited when prices fell sharply in the first half of last year.

Between February and May 2013 the yield on the 10-year US government bond – which moves inversely to its price – almost doubled from 1.6 per cent to 3 per cent.

“Annoyingly, I took the short position off in May and June, whereas others [within M&G] kept it on longer,” the manager added.

“We then started to increase duration [which is a measure of sensitivity to interest rate rises] across all funds once we had the big yield sell-off. We’ve never been outright bullish but we do think US government bonds are approaching fair value now.”

Mr Riddell also highlighted his underweight position in Japanese government bonds as having had a negative impact on the portfolio as these assets rallied during a strong year for Japan.