Insight: A tough task awaits global bond funds

This may be attributed to the fact that European bonds were in higher demand following the ECB interest rate cut and rollout of QE, but it may also simply reflect a rebound from the previous 12-month period when the fund lost 6 per cent.

Global bonds is a fairly disparate sector, but one striking result from the table is the similarity of five-year returns. Gam aside, there is just £230 difference between the second-best performer – Schroder ISF Global High Yield – and the 20th, Aberdeen Global Select High Yield Bond.

Aberdeen’s fund is another that is notable for having done well during a more difficult 2015/16, but struggling in 2014/15. It lost 5.4 per cent over this period, which is the second worst return in the table behind Pioneer’s European product, at a time when the typical fund in the rankings returned 10 per cent.

Nine out of the top 20 funds have existed for 10 years or more, and of those the Pimco GIS Euro Ultra Long Duration came out on top for cumulative performance over 10 years.

With an AGR of 14.4 per cent, the Pimco fund surpassed the average by some distance. Its base currency is euros, and it is managed by Lorenzo Pagani, managing director and portfolio manager, and head of the European government bond and European rates desk, at Pimco.

Despite achieving such impressive returns over the past decade, the fund’s performance has fluctuated dramatically on a year-on-year basis. In 2016/17, for example, the fund saw 11.5 per cent annualised growth, while in 2015/16 and 2013/14, it shed -1.3 and -4 per cent, respectively.

If bond returns are to struggle further in the coming years, it is long duration funds that will be hurt the most. Their sensitivity to interest rate rises is much higher than other portfolios’, meaning that even the slightest move higher in benchmark bond yields could have a severe effect. As a result, it would be difficult to find a retail fund buyer who would recommend such products at the moment.

The worm turns?

Many have speculated that bonds have reached an inflection point, but whether this proves to be the case is uncertain. On one hand is the drop in bond prices seen in recent months, but on the other is investors’ need for yield. In the case of higher-yielding debt, any fall in prices will only serve to make those yields look more attractive again.

There are also other factors for investors to consider in the coming months. In Europe, the upcoming French and German elections could yet spring a surprise similar to those seen in the US and UK in 2016. What this would do to bond prices on the continent is up for debate, but a continuation of the status quo would likely be a positive for bondholders.