Ucits III gives direction to Barings bond fund

Colin Harte, manager of Barings’ new Directional Global Bond unit trust, is likely to position the fund flat or slightly short duration to take advantage of rising bond yields. The new fund is similar to the existing £232m Baring Global Bond fund, but can short bond and currency markets. Harte (pictured) says simulated portfolios have shown that this additional facility will enhance returns but create no additional volatility. Investments in the fund will include long-dated gilts, US treasuries and Japanese government bonds. Harte adds: “In the existing Global Bond fund, if we wanted to take duration down we could only go over or underweight. In the new fund we can use the futures market to create negative duration and therefore benefit if yields rise.” The manager is negative on global bond markets generally and the fund will have a negative bias to Japanese government bonds, which Harte believes are the most expensive. He adds: “We are cautious on markets. If you still liked bond markets, you would have to be quite a strong advocate of global deflation. Even if you don’t believe that, the markets are likely to trade within a range of plus or minus 100 basis points. It is difficult to make clients extra money from that. If yields fall, we can make money as long as we call the market right.” Harte believes policy errors could result in a protracted bear market for bonds as inflation comes back into the system. He adds: “Aggressive monetary and fiscal policies being pursued in the US, combined with a record current account deficit, are likely to generate high levels of global fixed interest volatility in the foreseeable future.” The new fund will launch on March 1. It aims to deliver returns of around 8% a year after charges. It has been launched under the new Ucits III legislation, which enables funds to make money from rising or falling bond and currency markets by shorting within a unit trust or Oeic structure. The existing Baring Global Bond fund has been a strong performer, and now lies third of 49 funds in the Morningstar Sterling Global Bond sector over the three years to February 11.