Ollie Smith: It’s been a tough year for bond investors. there is no doubt. But our analyst thinks flexible bond funds still have something to offer in this environment. Giovanni Cafaro joins me now.
Giovanni, can you tell us a bit more about what flexible bond funds are and what they can currently offer?
Giovanni Cafaro: Hello, Ollie, and thank you for inviting me today. Thus, flexible global bond funds can be exposed to different sectors. So, for example, government bonds and corporate bonds, to name a few, across credit quality, ranging from investment grade to high yield and geography, in also considering the monetary element here. Thus, flexible bond fund managers tend to take a tactical and dynamic approach in adjusting the characteristics of their portfolio to implement their views. Thus, perhaps the two most important factors to consider here are credit risk and duration risk, hence the sensitivity of the portfolio to changes in interest rates.
In terms of performance, year-to-date, the sterling-hedged version of the global flexible bond fund category is down 14% at the end of last week. And to put that in comparison, global government bonds are down 13.7%, global corporate bonds are down 21.6%, and global high yield bonds are down 14.4%. %. But what is perhaps most interesting given the macro backdrop is the level of dispersion we’ve seen within the category, both in terms of the performance and positioning of these funds, and that highlights perhaps, from an investor perspective, the importance of relying on experienced investment teams and processes that have been tested through various economic cycles.
Smith: So the two funds you want to highlight specifically today – which is the first and what is its strategy?
Coffee: Of course. So the first one I wanted to talk about today is the Janus Henderson Strategic Bond Fund. The strategy is managed by John Pattullo and Jenna Barnard, co-heads of the Janus Henderson Strategic Fixed Income team, and together they have managed the fund since December 2008. The strategy has historically shown a credit bias, including the high performance, and sector allocation was the main driver of performance here. The shape of the portfolio is primarily influenced by the managers’ assessments of macroeconomic and market factors. However, top-down views are associated with security analysis, which is performed by both portfolio managers and their credit team.
So since the start of the year, they shifted to a more defensive positioning during the period, as managers expected the global economy to face a severe growth crisis. And in portfolio terms, that translates into an increased exposure to government bonds from around 10% at the end of last year to 50% at the end of August, because they see them as the best risk/return option in a severe downturn scenario. And that came at the expense of their credit allocation with their high yield exposure dropping to around 10% at the end of August. Sector-wise, they have maintained a preference for high-quality, defensive and stable sectors, and they generally favor large-cap, liquid and somewhat non-cyclical companies and adapt their style to, for example, certain areas of the fixed market. income range such as emerging markets, distressed debt or certain sectors such as energy. In terms of duration, they started the year with a very short duration at three years, and they gradually increased it to 8.5 years at the end of August, mainly through US and Australian interest rate exposures.
Smith: And the second of the two funds, how does that differ strategically?
Coffee: Of course. So, the second fund is the Jupiter Strategic Bond Fund. The fund is managed by experienced portfolio manager Ariel Bezalel, who has led the fund since its inception in 2008, and he has over two decades of portfolio management experience, but is also backed by Harry Richards , who was promoted to fund manager most recently in 2019.
The fund aims to generate income while considering capital preservation using a so-called barbell approach, balancing the capital preservation characteristics of investment grade government bonds with the income generating elements of their exposure to high yield debt with more marginal exposures. investment grade debt and emerging market companies. Thus, Bezalel’s active and opportunistic approach has added value over time and resulted in a strong balance sheet.
Year-to-date, their exposure to high yield has increased slightly from 55% to 60% as managers have taken advantage of distressed valuations as attractive entry points. However, they have kept a fairly conservative book favoring short-term issues and more defensive sectors. And that move was underpinned by their belief that current yield and spread levels truly represent the generational opportunity for fixed income investors. And from an economic point of view, the slowdown in growth suggests that central banks could adopt a loser’s policy if the economy falls into recession. And also due to these expectations, the duration of the portfolio was increased to 7.9 years at the end of August, from 4.9 years at the end of last year.
Smith: Great. To learn more about global fixed income markets and their reaction to movements in the macro world, visit one of our international websites, including Morningstar.co.uk. Until next time, thanks to Giovanni, I was Ollie Smith for Morningstar.