Global bonds overlooked as an attractive option

Published on Friday 23 October 2009 19:48

GOVERNMENT bonds are seen as a safe haven in times of economic turbulence. Unlike equity investors, it seems that those seeking exposure to this asset class routinely ignore the potential of the global market in favour of UK government bonds.

Mike Riddell, a member of the extensive fixed interest team at M&G, finds this strange. He pointed out that the M&G International Sovereign Bond fund excludes UK government bonds, making it attractive to those worried about sterling.

He said: "The global government bond market is broadly 25 per cent US treasuries, 30 per cent Japanese government bonds and 40 per cent European government bonds, with the balance made up of other issues.

"At the moment, the fund's US and Japanese positions are very underweight compared to the benchmark, as we believe that neither these bond markets nor the US dollar and yen are attractive."

Consequently the fund holds an 8 per cent position in Australia and 3-5 per cent positions in Poland, Norway, New Zealand and Canada, economies that remained relatively unscathed by the global banking crisis.

"Almost 40 per cent of the fund is in European government bonds, and we're happy having such a large exposure to Europe," said Riddell. "The euro has been strong and inflationary pressures are non-existent there. Broadly speaking, we don't see any problems with inflation until the banks start lending again which still seems some way off."

The fund does have around 13 per cent of the fund in inflation linked bonds, mainly in the US and Australia.

He said: "This actually isn't because we're worried about inflation, but because the inflation-linked bonds are cheaper than traditional bonds in some markets and give us a generous yield. Obviously we monitor this situation closely and if we were concerned about inflation, we could significantly increase the proportion of inflation linked bonds in the portfolio, although that isn't really what the fund is about."

The fund is about 55 million in size and will have attracted attention from those looking at past performance tables, with a 2008 calendar year return of 57.6 per cent. The relative strength of sterling so far this year means results have been less spectacular over the last six months, but as Riddell said "investors need to understand what they are buying".

A global bond fund that excludes UK exposure provides a hedge against sterling doing badly, but will underperform when it is strong.

&#149 For more information on the M&G International Sovereign Bond fund, call M&G on 0800 390 390.

Barry O'Neill is a chartered financial planner and director with Thomson Shepherd Ltd (incorporating Coggans Wood).