Fund spotlight: M&G Global Macro Bond Fund

interactive investor's analysts give an update and view on the M&G Global Macro Bond Fund.

The outbreak of Covid-19 has sent markets into turmoil and has got investors thinking about traditional safe-haven asset such as bonds and gold within a diversified portfolio. 

While major equity indices, both in the developed and emerging world, have posted heavy double-digit declines, demand for government bonds and other assets such as gold has increased. Attempts by governments and central banks to calm down markets with emergency measures, including stimulus packages, asset purchases and cutting interest rates to historically low levels (the Bank of England just cut its base rate down to 0.1%) have not worked so far. 

As we are still due to witness the economic impact of the coronavirus over the next few quarters, it is important to stress that volatility is likely to remain high for the foreseeable future, requiring careful assessment of risk exposure.

The fund

M&G Global Macro Bond was launched in 1999 and has been managed by the highly experienced investor Jim Leaviss since then. He was joined by Claudia Calich as a deputy manager in 2015. They utilise the vast fixed income resource and specialism at M&G.

This fund is the most flexible across M&G’s retail bond products. It has been designed to provide diversified exposure to the global fixed income markets through an unconstrained approach and by taking advantage of different market conditions.

Its main objective is to deliver a higher absolute return (a combination of capital appreciation and income) than the IA Global Bonds Sector over any five-year period. It does this by investing in a diverse basket of both government and corporate bond issues, currencies and derivatives. 

The selection process is based on the manager’s assessment of macroeconomic factors, including economic growth, interest rates and inflation and their impact on the long-term valuations for the asset class.

In addition, he applies an overlay of short-to-medium term market technical views which contribute to the short-term volatility management of the fund. In order to diversify the risk away, Leaviss invests in a number of themes with low to negative correlation across credit, rates and currencies. 

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The fund has no formal investment limits, however, it would be unlikely for an individual issuer of investment grade to go over 5% of the overall portfolio, where the same approach applies for high-yield issuers at 3%.

The team has an internal target limit of 20% Value at Risk (a measure of risk that estimates a potential loss in a set time) which further strengthens the risk framework of the fund. 

What’s in it?

The flexible, go-anywhere strategy means investors could expect relatively high portfolio turnover compared other strategies in this sector. Along with the risk management benefits this approach brings, some additional alpha could also be expected. 

As at the end of February 2020, the fund had 132 bond holdings out of 172 positions in the overall portfolio, with high concentration in the top 10 – representing 53% of the fund’s total assets.

The manager has been cautiously positioned for some time now given his concerns about a weakening of global growth. He has added more government bonds to his portfolio at the beginning of the year and positioned it with the long duration betting on interest rates to fall further. 

The fund has a tilt towards sovereign issuers, with around 50% invested in government bonds compared to 25% for the category average. The top three holdings include US Treasury Notes 2.75%, US Treasury Notes 0.62% and UK Gilts 1.62%. 

Its average credit quality was BBB with a modified duration (a measure of risk expressing the portfolio’s sensitivity to change in interest rates) of 7.63 years compared to 2.49 years for the Morningstar Global Flexible Bond Category average.

The manager also switched to a higher yen allocation of around 22% due to its strong defensive qualities.

How does it perform?

Source: Morningstar as at 13 March 2020. Total Returns in GBP

Due to its cautious positioning the fund has shown resilience during the recent market shock and has outperformed its category year-to-date by 5% and currently has a yield of 1.9%.

Over the long term, the manager has also demonstrated excellent management of the fund’s duration, credit, and currency risks and, as at 13 March, has delivered 79% and 35% over 10 and five years against 48% and 22% respectively for the Morningstar Global Flexible Bond group over the same periods.

The ii view

M&G Global Macro Bond features in interactive investor’s Super 60 preferred range of active and passive investments as a Core Global Bond option.

The fund offers diversified exposure to global bond markets via an unconstrained 'go-anywhere' approach, allowing the manager to invest in any type of fixed income security in the world in order to take advantage of the current market conditions. This comes with a specific target to outperform the fund’s formal Investment Association sector benchmark over any five-year period.

This strategy may fit the needs of a broader range of clients who are seeking to add lower-risk global exposure to their core portfolio, while at the same time gaining exposure to a range of themes with lower or negative correlation. 

• 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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