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Global strategic bond fund delivers on promise in Q3, says Standish

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The third quarter of 2009 saw the BNY Mellon Global Strategic Bond Fund return almost exactly twice the return generated by its Barclays Capital Global Aggregate Bond Index, according to David Leduc of Standish, the manger of the fund.

“The outperformance can be attributed mostly to the fund’s substantial overweight to corporate bonds,” says Leduc (pictured). “Nearly 70 per cent of the fund is now invested in corporate issues compared to its benchmark index which contains just 16 per cent. This gave the fund’s relative performance a tremendous boost as corporate bond spreads continued to tighten across the maturity spectrum in response to growing risk appetite on the part of investors. The fund’s out of benchmark allocation to emerging market debt issues also rewarded strongly.” 
 
Leduc believes the fund is well placed to take advantage of the “sweet spot” for bonds, with currency and duration positioning, security selection and asset allocation all offering the potential to contribute significantly to returns.

In allocation terms, Standish has continued to steadily reduce the level of government bonds it held when the fund was launched in April. Over the last quarter, it halved its holding to just over ten per cent, and instead added another four per cent to its emerging market debt weighting taking it to 13 per cent, and doubled its high yield bond exposure to over 18 per cent.
 
“We are still more attracted to emerging markets debt on a fundamental basis as it looks to be in a far better state than the high yield market. Emerging markets debt is typically more liquid than high yield debt, although the value in emerging market debt is generally less compelling than that of the high yield market. This means that our current bias towards high yield bonds is more of a tactical move to take advantage of current opportunities rather than a long-term commitment,” says Leduc.
 
Standish expects to see continuing modest improvements to global economic stability, and this should be supportive for bond markets. Despite the continuing efforts made by central banks to expand their balance sheets and infuse more liquidity into their domestic markets, the most palpable threat to a recovery remains that of deflation.

“If not for the efforts made by central banks, the deflationary consequences of the deleveraging that is underway in the private sector would already have had far more telling deflationary effects. That said, such deleveraging actually creates a very bullish environment for corporate bond spreads.
 
“Credit metrics should improve considerably over the next few years causing credit spreads to converge and we expect the global deleveraging theme to be around for many more years to come.”

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