With just 10% of managers beating their benchmark over the past 12 months it’s been a tough year for global bonds, which makes it even more difficult for stars to shine through.
We’ve had to dig through our data to find the managers with a track record of less than three years who have put in strong performances over this year.
Foresight on the eurozone crisis
With a one-year manager ratio of 0.75 and a total return of 6.2%, M&G’s Mike Riddell leads the pack. Manager of M&G’s International Sovereign Bond fund, Riddell (pictured) narrowly missed his Citigroup WGBI TR benchmark, which rose 6.3%, although his average peer returned 2.1%.
Riddell, who took over the lead manager role on M&G’s €83 million International Sovereign Bond fund in February 2011 has not been deterred by a difficult year.
He says a degree of foresight helped him position the fund early to reduce downside risk, particularly when it came to European sovereign debt.
‘Certainly the big driver this year for us was seeing very early what was happening in the eurozone and on the periphery,’ he says. ‘We sold out of French government bonds at the start of 2010, for example, but it has taken a long time for the market to start looking at them like this as well.’
At its heart, the International Sovereign Bond fund is built on a large exposure to German government debt. This, Riddell says, is one of few genuine triple A-rated securities available.
‘I am very bullish on all genuine triple-A rated investments, and I use that term deliberately, as even before the downgrade, I did not include France as AAA,’ he says. ‘Only Germany within the eurozone is truly triple-A rated.’
Other sovereign debt favourites within his portfolio include Norway, which Riddell likes due to its low net debt to GDP ratio, and Canada, which comprises 10% of his asset holdings.
Going into 2012, Riddell is positioning himself for continued difficulties in the eurozone.
‘There is quite a lot of selling in the non-core eurozone nations, and I include France as a non-core nation now,’ he says. ‘I think there is a big risk of capital outflows and I remain very, very negative on the euro.’
Riddell says he is instead focusing on Scandinavian currencies and adopting a preference for the Japanese yen and the US dollar when it comes to currency exposure.
Battening down the hatches
‘I think the market will never be starker than it has been over the past year and a half,’ he says. ‘In Q1 and Q2 of 2011 we went long duration getting closer to the benchmark and even longer in some cases, as well as selling out and reducing exposure to corporate bonds.’
As the year progressed Nash adopted a more defensive portfolio and split his holdings into three main country allocations: Japan, the US and the UK.
Describing himself as a ‘macro discretionary’ investor, Nash, in a similar vein to Riddell, says an early response to the eurozone crisis helped him return to positive territory at the end of 12 months.
‘We were, at the time, getting more risk averse and it was a little more difficult considering the competition in our peer group,’ he says. ‘I remember getting a lot of furious calls from clients as a lot of managers were seeking risk at the time but I went risk averse and that call came good in the summer when the environment became, shall I say, quite extreme.’
Challenging outlook remains
‘Our asset allocation had to evolve as the year went on and as we think about 2012, it is going to be very similar in that sense,’ says Gartside.
The trio of managers are hardly novices in the sector, with each bringing a considerable wealth of experience from other fixed income funds and positions.
Together they have returned 2.99% at the helm of the fund, which was launched in November 2010. The fund operates without a company-imposed benchmark and Gartside says this was key to helping them gain a positive return for the year.
‘Traditionally bond managers have to hold bonds they may not like very much because of the benchmark, but we don’t.'
‘This allowed us to make some fairly aggressive asset allocation calls and we were able to move between having 45% in high yield and going as low as 3%. There is that flexibility there,’ he says.
This article was originally published in the February 2012 edition of Citywire Global magazine.