When investing in global bonds, we believe the flexible and diversified approach of the M&G Global Macro Bond Fund allows us to select what we consider to be the most attractive opportunities in fixed income markets around the world. With the fund’s ‘go-anywhere’ approach, we can constantly reassess relative value, ranging from government bonds and inflation-linked securities, to investment grade and high yield corporate credit, floating rate notes, and emerging market debt. We seek to drive long-term performance by rotating assets towards those areas that we believe offer the best relative value, while staying away from segments of the bond markets where our view is less favourable.
In our efforts to gauge the global outlook, we firstly analyse macroeconomic factors, such as economic growth, inflation and interest rates. This is typically followed by an assessment of how these considerations may affect the prospects for the many different segments of the bond markets. For example, some asset classes within the fixed income universe have very different duration levels. In other words, their sensitivity to changes in interest rates differs. With the fund’s flexible mandate, we can look to increase or reduce exposures in different regions depending on the outlook for interest rate movements and yields across global markets. This freedom contrasts with portfolios invested in a single country or asset class of the bond markets, such as a US government bond fund or a European corporate bond fund.
Given the breadth of international debt markets, we believe that it is vital to have a strong team behind our investment processes and decisions. Our bond managers are therefore supported by a large fixed income research team with analysts covering all sectors of the government, financial, corporate, and emerging bond markets globally.
The selection of individual securities in our preferred areas of the market forms another key part of the flexible approach to global bond investing. We may, for instance, increase an allocation to certain types of corporate bonds as a play on a strengthening economy and a positive outlook for corporate profitability. If the economic outlook weakens and our view of corporate bonds turns more negative, or the risk/reward characteristics on government bonds become more positive, we could reduce corporate bond exposure and purchase higher rated government bonds. Through such assessments, a portfolio’s asset allocation and credit risk are actively managed, with the goal of adding value to long-term performance.
Monitoring emerging markets
We would also note that, in our view, emerging debt markets offer a widely diversified bond universe. This consists of sovereign and corporate bonds denominated in hard currencies, such as the US dollar and euro, as well as local emerging market currencies.
The emerging market corporate bond sub-asset class has been a particularly fast-growing segment of the global bond market over the past decade, and now offers what we consider to be broad investment choices across geographies, industry sectors, credit quality, and maturities.
Our approach to emerging markets emphasises careful and thorough credit research when allocating to the area. Despite the uncertainty and the ongoing challenges to the global economic outlook caused by the coronavirus pandemic, we maintain a constructive long-term view on the asset class on a selective basis. The backdrop of low or negative yields in developed markets has helped to underline the attraction of higher yields that can still be found among emerging bond markets, in our opinion. These yield differentials may be seen in Figure 1.
While default rates in emerging markets may be expected to rise, we believe that opportunities can still be found that offer adequate compensation for default risk. We would also note factors such as lower debt-to-GDP ratios in many emerging economies compared to developed countries. In addition, demographics remain favourable to emerging markets, given factors such as their significantly younger populations, which we believe should be supportive to their economic growth in the long term.
Additional currency lever
As well as the freedom to invest in any fixed interest security around the world, The M&G Global Macro Bond Fund can also invest in any currency. We consider currency investing to be a natural extension of global bond investing and it offers further diversification benefits, in our view. Within this approach, we examine the relative attractiveness of different currencies, analysing indicators such as capital flows, economic growth, current account balances, monetary policy, and valuation metrics such as real effective exchange rates and purchasing power parity. In doing so, we seek to weigh up the relative values of currencies and, similarly to bonds, assess how they may change. The outcome of this process is that we only hold currencies that we expect to perform well.
Relevantly, a diversity of factors typically has driven performance across global currency markets. Some currencies have tended to correlate positively to the oil price and to inflation. This may lead us to hold them in conjunction with inflation-linked bonds as we seek to increase the fund’s inflation sensitivity. Other currencies, such as the US dollar and Japanese yen, are typically viewed as ‘risk-off’ currencies that have tended to do well in times of market stress. Through such considerations, we always view currencies within the context of the other assets held in the portfolio, and approach currency positioning not only as a means to try to generate returns, but also as a way to manage and diversify risk.
Overall, we base our flexible approach to global bonds by focusing on where we have a favourable view across the full range of government and corporate debt in developed and emerging markets, while avoiding areas whose outlook we do not like.
The value and income from a 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.
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 in a fund.
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.
The views expressed in this document should not be taken as a recommendation, advice or forecast.