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Actively managed and uncorrelated focus amid risk aversion


The coronavirus pandemic has dominated sentiment in global financial markets in the year-to-date, as its economic implications prompted a significant repricing of risk assets. In response, governments and central banks in developed and emerging countries confirmed big economic stimulus packages. As well as fiscal measures , these moves included interest rate cuts and renewed bond-buying activity, which helped to provide some support to the performance of global fixed income markets.

The M&G Global Macro Bond Fund is a flexible global bond fund whose long-term performance is driven by the active management of its duration, credit risk and currency positioning. At times, these three key drivers have contributed in various amounts to the fund’s risk/return profile. However, from a long-term historic perspective their contributions to performance are well-balanced.

Please note that the value and income from the fund's assets will go down as well as up. This will cause the value
of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.

We seek to express our conviction investment views in the fund by typically constructing a diversified portfolio, with at least four to six uncorrelated themes across bond and currency markets. The fund can exhibit uncorrelated performance against periods of market stress, such as in the huge risk-off environment that recently unfolded (see Figure 1). The Covid-19 outbreak continues to underline this global risk aversion.

Figure 1:

MandG Global Macro Bond Fund

In turn, the fund can exhibit a low correlation with other asset classes (see Figure 2)

Figure 2:

MandG Global Macro Bond Fund GBP

Active duration management

We held very defensive positioning going into 2020 in the fund, based largely on our cautious global economic outlook and assessment of relative valuations in the different areas of the fixed income universe. Our main fund themes in January and early February included significantly adding duration as yields rose amid improved risk appetite as the New Year got underway.

In our longer-term view, yields were unlikely to continue rising much further unless a number of established trends diminish or come to an end simultaneously. These secular trends include demographics, technology’s downward impact on inflation, as well as the way globalisation has reinforced the employment of low-cost labour and manufacturing.

Consequently, we increased the fund’s government bond allocation. Duration lengthened from a relatively underweight level of 2.7 years at the end of 2019 to around 6.7 years in January and 7.7 years at the end of February. Duration contributions by currency were increased from the US dollar, euro, and sterling, with the former remaining the largest contributor. This notably longer duration stance, and sizeable allocation to US Treasuries, was a large contributor to the fund’s delivery of a positive return. For the Q1 2020 and year-to-date to 30 April periods, the fund’s positive result ranked in the first quartile of its benchmark, the IA Global Bonds sector.

Credit performance driver

Among other themes, we held a large underweight exposure to credit, reflecting our caution towards the economic outlook. In our opinion, tight spread levels lacked relative value, and we preferred to monitor the market for better buying opportunities. Our underweight stance was held in both the investment grade and high yield segments, partly via the inclusion of credit default swap (CDS) instruments. In the high yield asset class, we maintained a net allocation of around zero going into 2020. Overall. the fund’s significant underweight allocation to credit was an important contributory factor to its relative outperformance as risk assets recorded steep declines later in the Q1 period.

Following the marked repricing of corporate debt, we closely monitored credit markets for potential buying opportunities. In our view, valuations reached levels that were low enough to start offering attractive entry points on a long-term perspective. Consequently, the fund’s activity towards the end of Q1 included adding investment grade an high yield corporate bond exposure through both physical holdings and CDS positions. This did not necessarily mean that we thought spreads had reached their widest levels in this crisis. Instead, we kept in mind a lesson from the 2008/09 global financial crisis (GFC), which was that you didn’t need to try to wait and pick the widest point of increased spreads to make good medium/longer term returns after conditions subsequently stabilised and valuations tightened again.

Please note that investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital. All of these events can reduce the value of bonds held by the fund. High yield bonds usually carry greater risk that the bond issuers may not be able to pay interest or return the capital.

In total, we added about 2.5 years credit spread duration in March. Among cash bonds, we participated in some new issues from high-quality names that we like and, in our opinion, were very attractively priced. These included newly issued bonds from Coca Cola, Nestle, Pepsi, Exxon, Bank of America, and Sanofi. We also bought corporate bonds that we felt were oversold in the secondary market, including from NY Life, Met Life, JP Morgan, BBVA, and Apple. During April, the fund’s increased credit allocation was a key contributor to its relative outperformance as corporate bond markets delivered upside.

In emerging bond markets, while we believe the full impact of the coronavirus story may still lie ahead for some emerging nations, we also added some exposure on a very selective basis. In our view, the attraction of high real yields in some markets offered good relative value. The fund’s deputy manager, Claudia Calich, an emerging market bond specialist who is Head of Emerging Market Debt at M&G, provides important input into the fund’s security selection in this area. During March, we added emerging market sovereign exposure, including in South Africa and Ukraine.

Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There may be difficulties in buying, selling, safekeeping or valuing investments in such countries.

Increased US dollar

Turning to currency positioning, having reduced the fund’s US dollar exposure towards the end of last year, we went into 2020 with an underweight allocation to the greenback. This held back relative performance to an extent as the US currency appreciated against many currencies. However, we subsequently added US dollar exposure, particularly against the backdrop of the heightened global risk-off environment.

The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.

We also kept an allocation to the Japanese yen, a currency that we favour as a useful diversifier, as well as attractive on a number of valuation metrics. In addition, we maintained global diversity in the fund’s developed market currency positioning by also retaining some exposure to the euro and sterling.

In emerging markets, we continued to hold some modest local currency positions and, during April, our activity included adding to what we consider are more stable Asian currencies such as the Indonesian rupiah and Singapore dollar.

Overall. as a diversified global bond fund, we will continue to actively manage the fund’s currency exposures as we seek to add value to its performance.

MandG Global Macro Bond Fund GBP

Past performance is not a guide to future performance.

* Benchmark is the IA Global Bonds sector.

The benchmark is a target which the fund seeks to outperform. The sector has been chosen as the benchmark as the fund is a constituent of the sector. The benchmark is used solely to measure the fund’s performance and does not constrain portfolio construction.

The fund is actively managed. The fund manager has complete freedom in choosing which investments to buy, hold and sell in the fund.

Source: Morningstar Inc. and M&G as at 30 April 2020, GBP I Acc share classes, income reinvested, price-to-price basis.

The fund allows for the extensive use of derivatives.

The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
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