Nonetheless, the Investment Association Global Bonds sector has generated positive average returns across one, three, five and 10 years in spite of these headwinds.
In the past 12 months to April 12, the average return from funds in the sector was 3.1 per cent but those who have been invested for 10 years to April 12 will have been rewarded with an average return of 68.7 per cent.
But David Arnaud, manager of the CF Canlife Global Bond fund, believes that with bond markets seemingly at the whim of central bank actions now, “you have to read more into central bank behaviour than looking at your fundamental data”.
He explains: “In the US, it’s clear the central bank is worried about raising rates but it will be pushed into increasing rates by the summer. By June, it will have to start raising rates again. So we are going for two rate rises this year.
“The end of Q2 should be a key period for the US. At the moment the US, and especially the Fed, is running the show for all the other markets.”
He predicts by the summer there will be rising yields following a rate rise by the Fed.
“It’s going to be gradual because we still have very powerful forces in Europe,” he cautions. “The ECB is doing everything it can to keep yields low. And the fact that, in Europe, the central bank now wants to buy corporate bonds is putting pressure on corporate spreads, meaning spreads keep getting tighter.”
Baillie Gifford Global Bond
Phil Annen manages this £61m fund that invests predominantly in developed market bonds. According to the fund factsheet, the manager invests in a broad range of bond and currency positions and can make use of derivatives to take active positions. Having launched in August 2002, the fund has delivered decent returns. FE Analytics shows in the five years to April 13 2016 it generated 16.4 per cent for investors, just behind the peer group average of 18.5 per cent. It has outperformed the sector average over one year, returning 8.5 per cent against the sector’s 3 per cent return. A geographical breakdown shows the portfolio has 39.3 per cent in the US and a 22.1 per cent allocation to Japan.
F&C Global Bond
This fund has built up a long-term track record since its launch in February 1981, delivering a 54.7 per cent return to investors over 10 years to April 13 2016, although it lagged the IA Global Bonds sector average of 68.7 per cent over that period. Perhaps as a result of this, it remains just £21m in size. Manager Sujay Shah aims to provide income by investing in an international portfolio of interest-bearing securities mainly issued by governments. The portfolio has a 31.9 per cent allocation to AAA- rated bonds and 30 per cent in AA-rated bonds.
Marlborough Global Bond
Geoff Hitchin and Nicholas Cooling manage this £120m offering from Marlborough, with the former having been at the helm for 23 years. The duo have delivered good returns, FE Analytics shows. Over 10 years to April 13 the fund generated 88 per cent, beating the 68.7 per cent average from the sector. The largest regional allocation in the portfolio is to the UK at 34.2 per cent, followed by the US, which accounts for 20.6 per cent. A credit quality breakdown reveals the portfolio has a large weighting to BBB-rated credit at 39.3 per cent and is holding 16.4 per cent in cash.
Michael Stanes, investment director at Heartwood Investment Management, suggests: “We cannot ignore the fact that central banks will be increasingly challenged in their policy responses, whether for those in Europe and Japan burrowing deeper into negative interest rate territory or others, such as the Fed, which should probably be normalising policy, given a firming trend in US core inflation, but which is wary of external risks. Risks of central bank policy missteps and the US inflation outlook are both factors that we expect to receive the market’s attention this year.”
For Mr Stanes, this means maintaining a short duration position in developed sovereign bond markets, citing yields at historically low levels. He also points to “select areas of value” in corporate credit spreads.
There are 144 funds listed in the IA Global Bonds sector, although many are focused on one area, rather than being true global bond funds, so investors seeking a global remit will need to do their research.
In its Global Investment Outlook for the second quarter of 2016, the BlackRock Investment Institute states credit fundamentals appear decent in the short term, with positive investment flows into the asset class.
Peter Hayes, head of the municipal bonds group at BlackRock fundamental fixed income, says: “Government bond yields are low. This leaves little cushion against rising growth or inflation. Yet low yields make sense [when] interest rates are falling in many countries, central banks are gobbling up a big share of issuance and investors are more worried about return of capital than return on capital.”
In this environment, global bond investors should keep an eye on central banks at all times.
Ellie Duncan is deputy features editor at Investment Adviser