We’ve given a relaunch to the the M&G Global Managed Bond Fund, and, as you can see, it has a new name too – the M&G Global Macro Bond Fund. The “old” fund was a fettered fund of funds, invested solely in the M&G bond range, but thanks to some regulatory changes we’ve been able to adopt COLL “wider powers”, which allows us to invest not only in funds, but also in direct holdings and some of the more innovative fixed interest asset classes. In particular I will be able to invest in bank loans, or leveraged loans, via the M&G European Loan Fund run by Dan Gardner – this is the bond asset class we currently believe has the best risk/return characteristics. Yields (typically around 8%) are not far away from those of traditional high yield bonds, yet loan holders have full security over the assets of the company (like a mortgage) if something goes wrong, resulting in historically high recovery rates. Additionally the interest rate paid to investors rises in line with any rate hikes, so if the Bank of England and ECB continue to put interest rates up, the returns on these instruments increase. Ordinary unit trusts and OEICs cannot invest in these loans to any great extent, so we believe the Global Macro Bond fund – by virtue of its NURS regulatory structure – to be pretty much unique in the retail space with its significant holding in them (currently 14%).
So how will I run the fund? The name change to “Macro” reflects the way I think about markets – as an economist by training I will look to put on positions that reflect my long term views of the global economy. For instance I believe that the great wave of baby boomers retiring over the next decade could bring some risks to growth (lower) and inflation (higher); and I believe that sterling looks to be expensive against other currencies, especially as the ECB is likely to carry on hiking as Euroland growth ramps up. So I have been buying floating rate assets (like bank loans, and floating rate notes (FRNs)) which will perform if rates do have to rise, and I have a holding in euro denominated inflation linked bonds, which have cheapened significantly in the last 3 months. “Real” yields have risen from 1.56% to 2.07%, and additionally the euro has weakened against the pound by over 3% over the same period.
If I want to gain exposure to high yield, or sterling investment grade for example, I’ll buy my exposure through our own teams’ existing funds, thus gaining instant diversification and access to their stock picking. Otherwise I’ll invest directly, adding overlays to express my credit, currency and duration views, and using derivatives where necessary. Where property yields look cheap to bond yields I can take a modest investment into that asset class too – again thanks to the NURS structure. With so many interesting developments coming through in the world of fixed interest at the moment (for some reason bond investors love to innovate) we hope to be able to add more (generally higher yielding) bond instruments to the portfolio over time.
This fund sits in the Global Bond sector of the IMA classification – as such its returns will include a higher degree of currency risk than traditional UK based bond funds. Given that the pound is at pretty much its highest levels in living memory (the Bank’s Trade Weighted Index goes back to 1990, we’re at new highs now, although we have been a little stronger versus the US dollar in 1992 immediately before we fell out of the ERM). I think it’s time to take the view that its likely to revert to mean – and therefore that overseas asset exposure makes sense at the moment.
We’ll keep you posted on developments on this fund. Also look out for further updates on Richard Woolnough’s specialist M&G Optimal Income Fund.