Sometimes I struggle with statistics. Looking back more than two years to when I last cast my eye over the Global Bond sector, I find the number of funds listed in the performance tables has apparently shrunk by around 30 per cent, while the players in the tables appear to have changed out of all recognition. I find the Aberdeen Global Select High Yield fund – a strong performer then and still featuring prominently in the tables today. So not everything changes.
The situation today feels very different to that of the summer of 2013. We were still two years away from a general election in this country with little prospect of an interest rate rise, though I doubt few would have thought that the era of low interest rates would have gone on for quite as long as it has.
The search for income was well underway then, with Global Bonds a popular sector. All time frames reviewed produced positive returns, with the five-year tables delivering an average total return of 45 per cent and the top performer rising nearly 110 per cent. But the starting point had been the summer of 2008 when the financial crisis got well and truly underway.
Today the belief is that interest rate rises cannot be far away, though the slowdown in China has led many to forecast that the tightening of monetary policy in the US and here at home will be slower and less severe than previously thought. Even so, this outlook for higher rates and perhaps a resurgence of inflation is reflected in more muted performance figures, with the six months and one year tables in negative territory on average, despite adding in income, while the longer term numbers are hardly stellar.
Currencies are more an issue at the moment, too. While the strength of the US dollar has moderated a little, it is hardly surprising that those funds with exposure to US bonds have generally done well. Even the Euro has managed to hold up well, with much of the foreign exchange pain being felt in the emerging markets. Given that this latest bout of uncertainty has its origins in the surprise devaluation of the Chinese currency, this feels almost inevitable.
However, while China’s actions focused attention on the slowing of ita economy and the challenges this might present to global prosperity – arguably a plus for bond markets – it also highlighted the extent to which debt still remained a major problem in much of the world.
China had managed to spend its way out of the recessionary pressures of the financial crisis through concentrating on infrastructure projects, which in theory provide a stronger base for economic growth in the future. But the price has been a growing debt mountain that brings with it a whole new set of problems.
Against such a background it is hard to be over bullish on the global bond market, though a case can be made for their inclusion in portfolios as an income-producing asset likely to prove less volatile in the tough conditions that persist.
Certainly, equities have borne the brunt of investor disenchantment as fears over the sustainability of global economic growth build. Still, it is hard to avoid the conclusion that interest rates will start to rise sometime soon and that governments may well resort to allowing inflationary pressures to develop in order to devalue some of the debt that has built up.
Picking a fund or a manager remains a tricky business, though. M&G, which has a strong reputation as a bond manager, does not feature at the top of the tables on this occasion, unlike two years ago, though its European High Yield Bond fund – a good performer in 2013 – has retained top quartile places in three of the four timeframes reviewed. But it is clear that size and experience will not necessarily protect the investor from losses. Pimco, probably the best known of the specialist bond houses, does feature at the top in some tables, but also contributes the worst performer over five years – its Euro Short Term fund, down more than 9 per cent on a total return basis.
Key Takeaway: Bonds are altogether a larger and arguably more liquid asset class than equities. However, some funds have achieved a size where varying the portfolio mix could prove difficult if the outlook becomes more testing. The development of specialist fixed interest investment houses may have created a wider set of opportunities for investors and their advisers, but should not be assumed to always be the best answer.