Global bonds: Choose breadth over specialty funds
Scanning the IMA's global bond sector.
In particular, high-yield funds or funds that maintained high degrees of credit risk were clobbered. Take Andrew Wilmont's Axa Framlington Pan European Bond as an example. The fund lost 31% over the 12 months to 31 January, and this in an environment where the average fund in the sector was up 14.9%. Wilmont recently had a substantial skew towards lower quality credits, and any Sterling exposure would have hurt the fund given the pound's precipitous slide. Paul Causer and Paul Read's Invesco Perpetual Euro High Yield came in with only a slightly smaller loss, down 29.9% for the period. In this case, it is clear that the constraints under which they operate--maintaining a focus on high yield issues--would necessarily have hurt the fund.
The lesson here is two-fold. First, don't attribute much importance to sector ranks. The sector is so broad that the leaders and laggards tables will often simply reflect the fact that a particular asset class has moved in or out of favour rather than manager skill. Second, we believe investors should beware of chasing funds in this group that did well in the downturn. This is so for several reasons: First, it's almost always a mistake to fight yesterday's battle--indeed the very fact that so many funds with credit risk fared poorly suggests that there may be substantial value to be had in that area, whilst the yields on higher quality securities have been driven down sharply, suggesting further substantial price appreciation isn't in the cards (prices move inversely to yield) and that depreciation could even be in the offing in ensuing years. Moreover, for global funds, note that bond-picking (aside from avoiding defaults) did not matter as much as currency and overall credit quality in the past year. These kinds of macro calls are difficult to get right consistently, and some of the funds on the leaders board over the past 12 months may well have trouble staying there.
We firmly believe that investors too often hurt themselves by trying to make short-term tactical shifts. It's expected to make some moves, but in general, we advocate for well diversified portfolios designed to help investors reach their long-term goals while keeping risk at a level investors can manage. Along those lines, we think many of the funds in this group are just too specialised to be attractive--rather than trying to figure out how much Euro high-yield exposure one should have as a UK investor, for example, we'd advocate allocating a smallish slice of one's portfolio to a manager with a broad global mandate and allowing them to tilt the portfolio towards the most attractive opportunities. One exception might be the handful of emerging-markets bond funds, which can be used in small doses to help diversify a broader portfolio.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.
