‘How I dodged the Brexit bullet by selling sterling’
acting to protect the fund’s capital. We’re doing that in three ways. Firstly, we’ve been buying bonds that don’t behave in a traditional way, ignoring “fixed-interest” bonds that will fall in value if interest rates rise.
Instead we’re increasing buying of “floating rate notes”. They have the payout linked to interest rates. So as rates go up, the coupon resets at that higher level every three months. Our biggest holding at the moment is American floating rate notes.
The second thing we are doing is owning inflation-linked bonds. They will react more to expected changes in inflation, as opposed to interest rates.
We also use “futures”, a type of derivative contract. That allows us to take a position where we expect interest rates to rise.
They work the opposite way to traditional bonds – when interest rates rise, these instruments go up in value.
CV: Jim Leaviss
One way to look at this is what we call the “interest rate duration” of the fund. This is a measure of sensitivity to movements in rates. Currently, the fund’s duration is just over two years.
For instance, a 1pc rise in interest rates on a portfolio with a duration of 10 years would cause it to have a 10pc fall in value. With a two-year duration there would only be a 2pc fall in value.
Of course, the exchange for having this “short duration” is lower yields.
Long-duration assets typically have higher yields. But actually at the moment we’re not giving up very much, because 15-year UK government bond yields, for instance, aren’t actually that much higher than two-year yields.
Having no exposure at all to the pound over the course of the Brexit vote delivered a lot of value for investors and was the reason behind the strong performance we had in 2016.
The market was complacent about the risk of a “Leave” vote. I didn’t think that outcome was likely either but my job is about managing risk.
We thought if Remain did win the pound wouldn’t rally much. Whereas the Leave outcome would have a big impact. So to protect our pound investors in a global bond fund, having no sterling exposure was about reducing risk. I didn’t expect it to pay off as well as it did.
Globally, the rate of companies going bust has been very low since the financial crisis. Normally that’s where bond managers make their mistakes. For me, it has been more about not owning more emerging markets over the past two years when they’ve done tremendously well.
We’ve had 10pc of the portfolio in emerging market bonds, but we should have had more like 30pc. There was a lot of value there, yields were a lot higher than the rest of the world and they’ve performed very well.
Yes, there’s been political turmoil in places like Brazil and Turkey, but generally the environment has been quite benign and actually less politically volatile than the developed world, whether that be Britain, America or the EU. Yes, but I won’t say how much. It’s enough that I’d be very upset if I didn’t have it.
My performance-related pay is based on how well the fund does against other global bond funds over three-year cycles. A footballer, preferably for Nottingham Forest. “In recent weeks my feelings around the US have changed,” said M&G’s Jim Leaviss. “After Donald Trump was elected there was a dramatic sell-off of US government bonds because people thought he was going to start spending and there was going to be ‘reflation’, tax and healthcare reform.
“Since then there’s been disappointment and we took our exposure in US dollar, via both government and corporate bonds, down to below 50pc.
“But I think it’s gone far enough now. In the past three or four weeks we’ve increased our dollar exposure back up to 70pc and reduced our euro and Japanese yen exposure. Not because we’re worried about those economies particularly, but because those currencies both rallied so much against the dollar over 2017.
“The dollar had depreciated as people lost faith in Mr Trump’s ability to deliver economic growth and manage the various geopolitical situations he has found himself faced with. “But US economic data has been surprisingly strong again and I think it’s quite clear the Federal Reserve wants to get on with it and will be hiking interest rates at least one more time before the end of the year. “To add to our dollar exposure we’ve had to sell other holdings, such as Swedish krona. The Swedish government was the third highest issuer in the portfolio, at 2.9pc (see Top 10 holdings, above) because yields were significantly higher than other European countries. “The money printing programme of the European Central Bank meant you’ve been paying to lend to the German government for as long as five years.”