M&G Global Macro Bond: March 2022 update

• Jim Leaviss is a talented and experienced bond manager and has the support of a strong fixed income team at M&G
• The fund is in the Global Bond sector, rather than Strategic Bond, so the manager has more flexibility to invest in foreign currencies. This means the fund could help to diversify a UK-focused bond portfolio
• The fund has delivered good returns for investors over the long term
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The manager aims to generate a combination of income and growth over the long term. But as income isn’t a priority it might not appeal to portfolios invested for a high level of income. The fund could be held alongside equity funds for a diverse source of income or combined with more UK-focused bond funds to add geographical diversification to fixed income portfolios.

Manager

Jim Leaviss is lead manager of the fund and head of M&G’s public fixed income team. He has over 25 years of investment experience and has worked for M&G ever since joining from the Bank of England in 1997. He’s one of the few global bond fund managers to have successfully adjusted their portfolio in response to changing economic conditions on a global basis over the long term. Leaviss is assisted by a talented and well-resourced team, including Richard Woolnough, Ben Lord and Stefan Isaacs who work in the fixed income team at M&G.

Eva Sun-Wai is deputy manager of the fund. Sun-Wai joined M&G in 2018 on their Investment graduate scheme, spending time rotating across several different bond teams. Sun-Wai also became lead manager of the M&G Global Government Bond fund at the same time. Overall we believe Leaviss has the experience and resources to do an excellent job for long-term investors. Our conviction in this fund lies with him.

Process

Jim Leaviss starts with his 'bigger picture' macroeconomic outlook. This includes forming a view on economic growth, interest rates and inflation globally. This helps him decide how much to invest in different areas of the bond market. Leaviss is responsible for how the fund allocates money to different types of bonds and currencies.

The fund is typically invested with one third in global government bonds, one third in global investment grade corporate bonds, one third in higher risk high yield and emerging market bonds. Leaviss is likely to invest more in corporate and emerging market bonds when he is positive, and invest a greater proportion of the fund in government bonds when his outlook is cautious. He can also 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 but is a higher-risk approach if used.

As of the end of January, the fund had 54.7% invested in government bonds, 21.4% invested in investment grade corporate bonds, 20.5% invested in high yield corporate bonds and emerging market bonds. The rest of the fund is accounted for by cash and some securitized bond investments.

Leaviss’ freedom to buy bonds issued in different currencies also means movements in currency exchange rates can add or detract value. He therefore has a lot of flexibility in managing the fund, but this can add risk. The fund may invest more than 35% in securities issued or guaranteed by a member state of the European Economic Area or other countries listed in the fund’s prospectus.

In recent months the fund’s duration has been reduced with the Omicron coronavirus variant appearing less severe than first feared which could push yields higher as economic growth resumes. Duration is a measure of the sensitivity of a bond‘s price to a change in interest rates. In general, the higher the duration, the more a bond's price will rise as interest rates fall.

The managers believe that some areas of emerging market debt have attractive yields on offer where investors are compensated for the risk involved, particularly in areas where inflation looks to have peaked. They also continue to hold some inflation-linked government bonds, primarily in the US in anticipation of pent up demand being released into the economy. While the managers expect default rates to remain low, the fund’s corporate bond exposure remains fairly defensive. This is largely due to their concerns around excess supply of new debt issuance from companies looking to lock in lower borrowing rates ahead of expected interest rate rises.

Culture

Leaviss and the Fixed Interest team at M&G are some of the most experienced investors in the Global Bond sector. The fact Leaviss can call on the views of this talented team means he can make the most of the fund’s flexible, ‘go anywhere’ mandate to take advantage of his best ideas across the bond market. We think there are only a handful of investors with the skill to successfully manage a fund in this sector but the team at M&G are well equipped and have the resources to do an excellent job for long-term investors.

ESG analysis (environmental, social and governance) is integrated into the research process. Leaviss thinks actively engaging with companies on these issues helps the team manage and potentially reduce risk. Leaviss is incentivised based on the performance of the fund over a number of years, we think this is positive as it aligns his incentives with those of investors in the fund.

Cost

This fund has an ongoing annual charge of 0.63%, but we've secured HL clients an ongoing saving of 0.17%. This means you pay a net ongoing charge of 0.46%. The fund discount is achieved in the form of a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Performance

Leaviss has historically used the flexibility afforded to him in the fund to good effect to deliver strong returns for investors. He won't get it right every time, but we believe experience is vital for a manager of this type of fund and Leaviss is one of the most experienced bond fund managers in the UK. This is why our conviction lies with him as lead manager.

As we entered 2020 Leaviss had positioned the fund defensively, adding government bond exposure and increasing the duration of the fund to take advantage of potential interest rate falls. This helped the fund to hold up relatively well through the coronavirus induced market turmoil in March and April.

Leaviss then added credit risk to the fund after this sell off but as markets recovered in the months following, the fund didn’t keep pace. 2021 was a challenging year for bond investors as markets began to price in the likelihood of higher inflation and interest rates, and the knock-on effects. Historically, the fund's currency exposure has also had a significant impact on returns, with performance boosted by exposure to the US dollar when it is strong against sterling. After a weaker 2020, the US dollar had a better year in 2021, benefiting from an improved economic outlook in the US. Towards the tail end of the year, the fund’s inflation-linked bond investments contributed to performance while the defensive credit positioning helped to mitigate the impact of a widening in investment grade credit spreads.

Leaviss has a cautious outlook given the unattractive valuations on offer in many areas of the bond market. He believes that the evolving risks that investors face aren’t being adequately reflected in valuations, so it makes sense to position the fund defensively at this time.

Past performance isn’t a guide to the future. Source: Lipper IM to 28/02/2022.

Find out more about M&G Global Macro Bond, including charges

M&G Global Macro Bond Key investor information