Fund spotlight: Marlborough Global Bond Fund

interactive investor's analysts give an update and view on the Marlborough Global Bond Fund.

Bond markets have performed strongly since the financial crisis, mainly boosted by government and central bank policies, such as low interest rates and quantitative easing. While bonds have provided investors with strong capital gains, bond yields have been pushed to historic lows, making them unattractive for income investors. 

Although bonds continue to offer investors the benefits of diversification away from equities, along with stable income and relatively low volatility, given the low yield environment, investors must make their bond funds work a bit harder than they have done in the past.

The fund

Marlborough Global Bond has been run by highly experienced manager, Geoff Hitchin, since its launch in 1987. He is supported by skilled manager, Danny Fox, who joined the firm in 2018. 

Geoff and Danny adopt a relatively cautious long-term approach, designed to capture upside while limiting the effects of market falls, by investing in government and corporate bonds around the world with varying credit ratings and different maturities. Being unconstrained by any index means the fund can invest anywhere and, in any currency. That gives the managers freedom to select those assets they believe are likely to benefit from the prevailing market trends and economic condition. 

The managers take the view that when the market is in 'risk on' mode, the bonds with a slightly riskier profile are more likely to perform well.

Alternatively, when the market is in 'risk off' mode, the longer-dated, lower-risk bonds typically benefit. The managers use this idea in their strategy and add value through a combination of careful bottom-up bond selection and macro currency calls.

What's in it?

The portfolio includes approximately 500 bonds with exposure to around 350 different issuers, varied by geography, credit rating and duration. The portfolio is well diversified, with the largest position size at only 0.7%. By holding a good spread and selecting individual bonds carefully, the managers have achieved consistent performance with below average volatility. In addition to this, the portfolio is paying a moderate level of income with a current yield of 3.6%.

As bond markets generally incur relatively high transaction costs, the managers focus on a long term 'buy and hold' strategy. This keeps turnover low and helps to preserve investors' capital over time.

Over 80% of the portfolio is invested in investment grade bonds, with over 40% in BBB-rated bonds. This is due to the manager's view that BBB-rated bonds offer the most favourable risk-return characteristics in the current environment. 

For example, the managers recently looked at hotelier InterContinental's (LSE:IHG) bonds, which have been BBB-rated since 2011, with protection for investors in the form of pay-outs should the bonds rating fall below investment grade. With operations in over 100 countries, the business is well positioned to benefit from the global increased spending on tourism, driven by a growing middle-class in many countries, combined with low-cost air travel. 

The managers are concerned about a weakening of global growth, however. While portfolio duration is broadly in line with the market, to follow this view, around 10% of the fund is allocated to government-backed bonds, and corporate bond exposure is tilted towards the more defensive sectors. 

The fund has 40% allocation to industrials and 10% to utilities. Financials make up 27% of the portfolio, as the managers favour insurance companies which are less exposed to the economic cycle.

Geographically, the fund's largest exposures are to North America and the UK, accounting for around 30% each. Despite the ongoing uncertainty over Brexit and US trade, the managers still have a general preference for UK and US businesses over those in continental Europe and the rest of the world.

The fund has maintained strong liquidity, with a significant cash position, primarily in Japanese Yen, which is a useful diversifier in an uncertain global environment. In the other major currency blocks, the fund maintained a ‘neutral’ position in sterling given the continued Brexit uncertainty, while it’s ‘overweight’ the US dollar to reflect their view that it can strengthen further against other currencies despite the recent calls for lower interest rates. 

How does it perform?

By striking the right balance and taking great care in selecting individual bonds, the fund has been able to manage volatility and achieve consistent performance with a moderate level of income.

Source: Morningstar Direct as at 30th June 2019

The ii view

Marlborough Global Bond Fund features in the ii Super 60 list of high-conviction active and passive funds as a Global Bonds recommendation.  The fund provides core, well-diversified exposure to investment grade bonds, issued by governments and companies around the world. The fund is managed by highly experienced managers adopting a conservative and patient approach, with a strong focus on risk management.

However, the flexible and unconstrained nature of the portfolio means its returns can deviate from the index and peers. In addition to paying a moderate level of income, the fund can offer investors the benefits of diversification away their equities allocation in a well-diversified portfolio. 

• Find out why this fund is on the ii Super 60 investments list
• Click here for more information on this fund, including price, yield and charges

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