M&G Global Macro Bond - manager more cautious on bond markets

• Jim Leaviss has invested the fund more cautiously than in previous years
• He thinks the pound and Japanese yen are good value and has increased exposure
• We think this fund can bring diversification to a portfolio and it remains on the Wealth 50

Our view

The global bond market is huge. In fact, it's much bigger than the the global stock market.

It means there are lots of opportunities out there. From bonds that pay a decent income to those with the potential to grow the value of your investment. That's not all. We expect many bonds to perform differently to shares meaning they could bring diversification to a wider portfolio too.

The M&G Global Macro Bond Fund aims to make the most of these opportunities. We think it offers something different to most other bond funds. One of the fund's main benefits is its truly global approach. It often has a lot invested in overseas bonds and currencies.

Leaviss and the Fixed Interest team at M&G are some of the most experienced investors in the Global Bond sector. While the fund does not prioritise a consistent level of income, we feel it is a great choice to maximise total returns from the fixed-interest component of a portfolio. All funds and the income they pay can fall as well as rise so you could get back less than you invest. The fund features on the Wealth 50 list of our favourite funds.

What changes have been made?

Leaviss thinks it's tough to be optimistic about the outlook for global economic growth and has invested the fund more cautiously.

Around 40% is invested in bonds issued by the US government and a further 10% is invested in UK and Eurozone government bonds. These bonds are often seen as a safe haven so have the potential to do well in more turbulent economic times. Investors should note that the fund has the flexibility to invest more than 35% in securities issued or guaranteed by a European Economic Area (EEA) state or other countries listed in the fund’s prospectus.

The manager also increased the fund's sensitivity to changes in interest rates. He thinks the chances of an interest rate rise (which would cause bond prices to fall) are low given his gloomy economic outlook.

Investments in high yield bonds, which pay a higher yield to compensate investors for their added risk, have been reduced.

The amount invested in higher-risk emerging market government bonds has also reduced, but they still form 16% of the portfolio. Leaviss thinks there are plenty of good yields on offer in emerging markets and a patient approach will be rewarded in the long run. However they can be more volatile than bonds issued by developed countries.

He has the flexibility to use derivatives to enhance returns. This allows him to quickly vary exposure to different types of bonds and currencies, as well as benefit from falls in asset prices and rising interest rates, although it adds risk.

Currency positioning

Following a period of strong performance, Jim Leaviss felt the US dollar offered less value and reduced exposure accordingly. It remains the fund’s largest currency exposure, however.

In contrast, he increased exposure to the Japanese yen which he believes is one of the world's cheapest currencies. Plus it has a low correlation with other asset classes meaning it provides diversification. He also thinks the pound is cheap compared to most other currencies and has increased sterling exposure.

How's the fund performed?

Leaviss has a good long-term track record. He's managed the fund with his current approach since January 2007 and it's grown 153.8%* over that time, compared with 90.0% for the broader Global Bond sector. Past performance shouldn’t be seen as a guide to the future though.

Past performance is not a guide to the future. Source: *Lipper IM to 31/07/2019

Since the UK's vote to leave the European Union in June 2016, the fund's benefited from investments in overseas currencies which were boosted by sterling's weakness. This was the main reason the fund delivered a higher return than other funds in its sector over this time, although it's not a guide to how the fund will perform in future.

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