M&G Global Macro Bond: May 2020 fund 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 and could diversify a UK-focused bond portfolio
• The fund has delivered strong returns for investors over the long term
• This fund is on our Wealth 50 list of funds chosen by our analysts for their long-term 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 suit portfolios invested for a high level of income.

The fund could be invested in 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 head of M&G’s public fixed income team and invests with conviction. Leaviss has over 25 years of investment experience and has worked for M&G ever since joining from the Bank of England in 1997. He is one of the few fund managers to have successfully adjusted the 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 when it comes to selecting individual bonds. This includes Richard Woolnough, Ben Lord, Stefan Isaacs, and the deputy manager of the fund Claudia Calich. We believe the managers have the experience and resources to do an excellent job for long-term investors.

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 to decide how much to invest in different areas of the bond market. Leaviss is responsible for how the funds 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-sixth in global higher-risk, high-yield bonds and one-sixth in higher-risk emerging market debt. This can change at any given time depending on the manager's views.

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 (which are negative for bonds) but is a higher-risk approach if used.

Leaviss’ freedom to buy bonds issued in different currencies also means that 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.

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 funds flexible, ‘go anywhere’ mandate to take advantage of the 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 is integrated into the research process. Leaviss thinks actively engaging with companies on these issues helps the team to 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

The fund has an annual ongoing charge of 0.78%, but through Hargreaves Lansdown you can secure an ongoing saving of 0.32%. This means you’ll pay a net ongoing charge of 0.46%. The fund discount is achieved through 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 demonstrated this in mid-2016 with his willingness to take a cautious approach in the run up to the UK's referendum on EU membership, and then took advantage of volatility in the wake of the vote. 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.

He positioned the fund defensively running up to the coronavirus crisis, adding government bond exposure and increasing the duration of the fund to take advantage of potential interest rate falls. 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. This helped the fund to hold up relatively well through the recent market falls and partly explains why it showed a strong last year of performance in the table below although remember this is only over a relatively short time period.

Leaviss thinks that when things normalise we could see some of the fastest quarters of growth in history and the potential pent up demand could cause inflation. He’s used the market fall after the disruption caused by the impact of the coronavirus as an opportunity to increase exposure to attractively valued corporate bonds. Mostly this has been in the investment grade space, where he believes the lower prices and higher yields now on offer are worthy of inclusion.

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. US Dollar exposure in the fund has increased recently and is now above its average historic level. Leaviss thinks that the Dollar will continue to be well supported and the US Federal Reserve’s ability respond to a crisis make it a unique proposition in the world. We expect the fund's currency exposure to continue to be a key influence on performance going forward.

Past performance isn’t a guide to the future. Source: Lipper IM to 30/04/2020.

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

M&G Global Macro Bond Key Investor Information