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Global bonds: separating the Connerys from the Lazenbys
by Robert St George on May 09, 2014 at 11:13
The latest analysis from Citywire Discovery looks at the Global Bonds sector
To state the obvious, running a global bond fund is not easy. Even with a relatively straightforward UK corporate bond mandate, for example, a manager has to contend with the thicket of credit risk, duration risk and so on. Few individuals excel at everything.
Added to those standard issues for a global manager are questions of political risk, currency risk, and of course an immense basket of securities from which to choose. The Barclays Global Aggregate Float Adjusted Bond index, for instance, has 15,738 constituents. For comparison, the MSCI All Country World index contains 2,433 stocks.
So it is perhaps incongruous that two of the Global Bonds sector’s best managers hail from boutiques lacking the vast analyst teams boasted by some of their giant competitors.
The chart above plots managers’ 10-year risk-adjusted returns against their three-year risk-adjusted performance. Put simply, those highest up have done best over the past decade while those furthest right have starred since 2011.
In the crucial top-right corner two managers have established a commanding position: Citywire AAA-rated Bruno Crastes of H2O and A-rated Geoff Hitchin of Marlborough. Both head relatively small funds supported by fairly small teams, although beyond that they diverge widely.
The H2O MultiBonds fund managed by Crastes is particularly eclectic: among other strategies it employs both directional and relative trades, it goes long and short, and it plays currency markets. The Marlborough Global Bond fund, tiny at £41 million, is more straightforward with modest portfolio turnover and a large allocation to the UK.
The next performance tier on the chart comprises M&G’s Jim Leaviss and AA-rated Stephen Smith of Legg Mason. As bond houses their groups dwarf H2O and Marlborough, with the attendant superior resources.
To their left on the chart, indicating an impressive long-term record but a weaker spell of late, is the Michael Hasenstab juggernaut. He steers three products in this sector: the £23.3 billion Templeton Global Bond, £21.2 billion Templeton Global Total Return, and £264 million Templeton Global Total Return Bond funds.
Finally, languishing in the bottom left to confound any pattern is Paul Thursby of F&C. He runs a mid-sized fund in a mid-sized firm, like all the other veterans mentioned here has a lot of experience, like them too has a co-manager, but unlike them has no broader responsibilities at his firm.
So, in essence, experience, resources and assets are sadly no guarantees of anything in the global bonds space.
The analysis comes from Citywire Discovery, a new desktop system that allows fund buyers and fund groups to access track records of over 9,000 managers tracked by Citywire. It provides unique insights into peer group analysis, performance comparisons and competitor analysis. For more details contact firstname.lastname@example.org
Bruno Crastes, Natixis
AAA-rated Crastes only launched his H2O MultiBonds fund, distributed by Natixis, in 2010 but he figures in this peer group of veterans because Citywire Discovery factors in his longer record that stretches back to Crédit Agricole Asset Management – now Amundi – where he was chief executive of the London office.
Crastes quit there four years ago to form H2O with chief investment officer Vincent Chailley. H2O now employs 19 investment professionals, and manages almost £3 billion in total.
The H2O MultiBonds fund keeps diversification as its byword, seeking to outperform its benchmark JPMorgan Government Bond index by 2% over a three-year investment horizon with an indicative tracking error of up to 6% per year – in all market conditions.
It has succeeded in this regard. Last year, while the index dropped 8.2%, H2O MultiBonds returned 11.3%.
Three-year total returns: 53.8%
Michael Hasenstab, Franklin Templeton
Hasenstab's slip down the rankings on a three-year view is primarily due to the weaker recent performance of his Templeton Global Bond fund. His two total return vehicles in this sector are both comfortably above average for the period, but Global Bond has slipped below the peer group average.
Perhaps more worryingly, though, it has fallen into the sector’s bottom quartile over the past year – as have the total return pair – suggesting there will be no swift recovery.
The total return portfolios are broadly similar, sharing average credit qualities of BBB and average durations below 1.5 years, and have substantial weightings to Mexican and South Korean bonds. Global Bond has a higher average credit quality at A-, an average duration slightly above 1.5 years, and a more even regional spread that favours Ireland, Poland and Malaysia alongside Mexico and South Korea.
Three-year total returns: 15.1%
Stewart Cowley, Old Mutual
Cowley, + rated by Citywire, is a reliably engaging commenter on fixed income markets – and much else besides. He recently tied the extraction of his wisdom teeth to Mario Draghi imparting new wisdom to the market.
Cowley welcomed this, given his complaint that bond markets now move ‘in a coarse and uncouth way, indiscriminately sending prices higher or lower to an extent that you feel like a helpless passenger commentating on a car crash rather than a careful driver steering a considered course’.
As the chart above indicates, Cowley has been something of a victim of this. While his long-term record is commendable, his £870 million Old Mutual Global Strategic Bond fund is now below average on a three-year view and bottom quartile over one year.
Cowley has nonetheless kept faith with a relatively concentrated portfolio of around 65 holdings, with an emphasis on high quality AA-rated bonds and 71% of the fund in government debt, and has characterised his long-term strategic positioning as negative duration in the US and Japan and long duration in Europe.
Three-year total return: 5.8%
Paul Thursby, F&C
It was three years ago that the fund decoupled from the peer group, which it had been modestly beating until then. In 2011 the fund lost almost 1% while its average rival put on more than 2%, which opened up a gulf that compounded a year later as F&C Macro Global Bond lost more as others posted further gains.
That painful lag during the bond rally, however, has been followed by a decent defensive showing during the past year’s bear market. While the average fund has plunged by 7.7% through the 12 months, F&C Macro Global Bond has actually returned 0.6%.
Thursby plans to remain cautious. ‘Our main concern remains the deflationary threat to the global economy and we continue to be nervous about any asset class that is deemed risky and favour long-dated US Treasuries. It is likely that, after five years, the US recovery is now due to slow naturally. In addition there are many geopolitical issues such as Ukraine that have not been priced into markets.’
Three-year total return: -5.4%
More about this:
Look up the funds
- H2O Multibonds R
- Marlborough Global Bond Inc
- M&G Global Macro Bond A USD Acc
- LM Brandywine Glb Opp Fixed Inc Fd P Dis (M) (AH)£
- LM Brandywine Glo Fxd Inc Fd A Dis (S) (AH)£
- Templeton Global Bond (Euro) A (acc) EUR
- Templeton Global Total Return A (Mdis) EUR
- Templeton Global Total Return Bond A Inc
- F&C Macro Global Bond £ A GBP Inc
- Old Mutual Global Strategic Bond A GBP Hdg Acc
- Templeton Global Bond A (Mdis) USD
- Old Mutual Global Strategic Bond A Inc