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Global bond fund managers place emphasis on capital protection

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Managers of global bond funds are placing increased emphasis on capital preservation over the traditional objective of relative benchmark performance, according to Standard & Poor’s Fund Services in its latest review of the sector.

James Mashiter, lead analyst at S&P Fund Services, believes this pattern will continue for two main reasons.

“Firstly, as Ucits III sophistication becomes more commonplace, managers can more easily reduce volatility and limit drawdowns with derivative overlays. Secondly, fund management groups are becoming more receptive to the idea that investors would rather underperform a benchmark and make a positive return, than beat a benchmark and lose money,” he says.

Mashiter points to Tri-Alpha International Bond Fund, which aims to deliver a six to eight per cent absolute return a year (before fees). Meanwhile, Stewart Cowley at Old Mutual aims to grow the fund’s NAV and beat cash on a consistent basis, and feels that this should enable his fund to outperform the benchmark and achieve top quartile performance over a cycle.

However, opinions on how this might be achieved are more divergent than ever.

“A notable feature of fund manager interviews this year has been the polarisation of opinion on the outlook for fixed income markets,” says Mashiter.

The team at ACPI thinks that markets will eventually baulk at the prospect of more issuance and are also worried that political gridlock could delay necessary fiscal austerity measures, and have therefore kept duration low at 2.5 years.

Others, such as Paul Thursby and Peter Geikie-Cobb at Thames River, are more comfortable owning government duration, pointing to the amount of spare capacity in the global economy and high unemployment levels in the developed world. Duration in the Thames River funds reached 7.5 years, but has recently been reduced somewhat to accommodate larger currency bets.

Some are betting that the dollar will be supported by an improving economic outlook, while others expect the greenback to resume its long-term decline. Stewart Cowley at Old Mutual, for example, thinks that the US dollar could come under pressure from discriminatory capital. On the other hand, he favours proxy currencies for Chinese expansion, namely, South African rand, Japanese yen and Australian dollars.

Meanwhile, Paul Brain and the team at Newton prefer countries that can pay their own way rather than those relying heavily on foreign capital. For this reason, they like the Norwegian krone and the Australian dollar.

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