Baring Directional Bond fund performance hit by vagaries of market

A combination of being defensively positioned in bond markets, short in global currencies and the expectation of rising bond yields seriously damaged the performance of the Baring Directional Bond fund in 2005.

The fund, managed by Colin Harte, was launched in March 2004 and was the first absolute return bond fund to come to market.

Set up under Ucits III regulations, Harte has the ability to go either long or short in global bonds and currencies, with the aim of returning 4% above the three-month sterling London inter-bank offered rate (net of fees). However, in 2005, Harte says, the fund only generated a return of 1.5%, after fees, which is less than cash would have returned over the same period.

He explains: “In the first three quarters of last year, bond yields did not rise as we had expected. Growth disappointed in America and Japan and US yields were dragged down by European yields. The strength of the dollar in the fourth quarter also caught us out and adversely affected the fund’s performance.”

Rather than change the fund, however, Harte remained short on the dollar, and as the currency started to weaken from December, the fund’s price has gone up accordingly, he says. “We have learned lessons from what happened last year. The style of the fund is to be contrarian and bet against the consensus,” Harte says.

Indeed, from the turn of the year to May 10, the fund has delivered a net return of 8%, beating the return on cash (2%) over the same period by six percentage points.

Harte says he now sees that bond markets have moved from being poor value to “ok” value. As a result, he has reined in his short-duration positions, especially in Europe and Japan, going long duration instead.

“The fund is still short two years on Japan, but it is now long one year in both Britain and America,” he says. “While these markets are still far from cheap, they are getting to the point where they look more attractive.”