M&G Global Macro Bond - a fully flexible, global bond portfolio

Kate Marshall | Mon 17 July 2017

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• A fully flexible fund with the ability to invest in bonds and currencies across the globe
• Provides diversification to a UK-focused bond portfolio
• Exposure to the US dollar has decreased while investments in emerging market debt has risen

Our view

Market commentators have attempted to call the top of the bond market on several occasions in recent years. Yet in a low interest rate, low growth environment, investors have found favour in the income that bonds offer and these markets have continued to perform well.

As bond prices have risen, yields have fallen, and there is arguably now less value on offer in these markets. As such, we believe a fully flexible approach is currently a desirable characteristic of funds investing in bonds.

The M&G Global Macro Bond Fund offers a “go-anywhere” approach to bond investing. The fund can invest across the fixed-interest spectrum, including government bonds and higher-quality investment-grade corporate debt, as well as higher-risk high yield bonds and emerging market debt. Jim Leaviss, the fund’s manager, can also use derivatives to enhance returns. This allows him to quickly vary exposure to different types of bonds and currencies, as well as benefit from falls in asset prices and rising interest rates (which are negative for bonds), although this adds risk.

The fund was added to the Wealth 150+ list of our favourite funds one year ago and it has since outperformed its peer group, the IA Global Bond sector. Please remember past performance is not a guide to future returns.

Past performance is not a guide to future returns. Source: Lipper IM to 30/06/2017

Jim Leaviss and the Fixed Interest team at M&G team are some of the most experienced investors in the sector. While the fund does not prioritise a consistent level of income, we feel it is a great choice to maximise total returns from the fixed-interest component of a portfolio, although there are no guarantees. It could also be used to diversify a UK-focused, fixed-interest portfolio and provide exposure to currencies other than sterling.

Currency outlook

A UK-based investor is likely to have a bias to sterling, but there are merits to having exposure to overseas markets and currencies. This was brought into focus over the past year as sterling weakened against many of the world’s major currencies, particularly in the months following the UK’s vote to leave the EU.

The M&G Global Macro Bond Fund’s flexible approach to foreign currencies can have a significant impact on its performance. A large exposure to the strengthening US dollar boosted returns over the past year, although it acted as a hindrance in recent months as the greenback weakened against the pound.

Following its period of strong performance, Jim Leaviss felt the US dollar offered less value and reduced exposure accordingly. It remains the fund’s largest currency exposure, however. The US is in the process of gradually increasing interest rates, which could continue to increase the value of the dollar. This is partly because higher interest rates tend to attract foreign investment, which increases the demand for, and value of, the currency. The manager believes the US dollar also continues to offer important diversification to the portfolio.

Elsewhere, Jim Leaviss increased exposure to the British pound as he views it as one of the cheapest major currencies in the world. He is mindful Brexit creates uncertainty for the UK economy and could lead to a period of subdued growth, at least in the short term, but believes sterling is unlikely to fall much lower and could strengthen from current levels. Exposure to some emerging market currencies, including the Brazilian real, Mexican peso, South African rand, and Indonesian rupiah, has also been increased.

What about the UK?

Where the US leads, others often follow and many have questioned if the UK will be the next to increase interest rates. However, Jim Leaviss believes this could leave both consumers and companies in a vulnerable position. Many have taken advantage of the low interest rate environment to increase borrowing and this could make it harder to pay down debts once rates start to rise.

Furthermore, while UK unemployment rates are low, wage growth has not kept pace with rising inflation. In the event rates rise, borrowers could be forced to a use a greater proportion of their earnings to pay off debts. Consumers could also have less to spend on goods and services, which in turn could be bad news for businesses.

Yet rising inflation could put pressure on the Bank of England to raise interest rates sooner. Jim Leaviss has therefore kept the fund’s duration relatively low. Duration is a measure of the fund’s sensitivity to rising yields or interest rates. When interest rates or bond yields rise (and prices fall), this low duration stance should provide an element of protection to the portfolio, although the fund could still fall in value in this environment.

How is the rest of the fund invested?

Around two thirds of the fund is currently invested in global government bonds and cash. The remainder is largely invested in corporate bonds, although exposure was reduced following strong performance last year.

Jim Leaviss continues to find value in bonds issued by US financial companies and banks. A period of weakness following the US Presidential election last November provided the opportunity to invest in these bonds at more attractive prices (and higher yields), including those issued by Bank of America and Goldman Sachs.

Fears surrounding Donald Trump’s proposed protectionist policies also caused volatility in the emerging market bond markets and the manager used this as an opportunity to top up exposure. These bonds tend to offer higher yields to compensate for the extra risk taken in comparison with developed-market bonds. The manager initiated investments in bonds from the governments of Paraguay and Bolivia.

The fund may also invest more than 35% in securities issued or guaranteed by an EEA state or other countries listed in the fund’s prospectus.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.