- Although global bonds have entered into bear market territory, unconstrained bond strategies have fared well this year.
- Unconstrained bond funds are not managed against traditional fixed income benchmarks, but rather, a cash-based index. This provides them with the ability to adjust their duration exposure along the interest rate cycle.
- Our recommended fund, Allianz Global Opportunistic Bond, is an unconstrained bond fund that seeks to exploit the best opportunities from global fixed income markets across the cycle, regardless of the interest rate environment.
- The high inflation, weak economic growth, and inversion of the yield curve have prompted the fund to gravitate towards developed market government bonds, with an average portfolio credit quality of AA-.
- Since inception, the fund has significantly outperformed the traditional global bond benchmark Bloomberg Global Aggregate Bond Index. It has also done well in the area of risk management, making it a worthy pick as a portfolio diversifier.
No doubt, it has been a challenging year for global bond markets in light of the US Federal Reserve’s most-aggressive tightening campaign in decades. Although global bonds have entered into bear market territory (down more than -20% from peak), unconstrained bond strategies have fared well this year.
This includes our recommended global bond fund for the second consecutive year – Allianz Global Opportunistic Bond – which delivered a resilient year-to-date return thanks to its unconstrained strategy that allows for a better management of interest rate risk in this tough environment.
An “all-weather” global core fixed income strategy
Unconstrained bond funds differ from traditional bond funds in a way that they are not managed against traditional fixed income benchmarks, but rather, a cash-based index. This provides them with higher flexibility when it comes to their choice of fixed income assets, ranging from Treasuries to high yield bonds. As such, these funds also have the ability to adjust their duration exposure along the interest rate cycle.
The Allianz Global Opportunistic Bond (GOB) is an unconstrained bond fund that seeks to exploit the best opportunities from global fixed income markets across the cycle, and provide investors with decent returns regardless of the interest rate environment. It targets to return 4% per annum over the Secured Overnight Financing Rate (SOFR), on average, over a market cycle.
Due to its unconstrained nature, the fund’s duration exposure can range from zero to nine years. In the second quarter of the year, the Allianz GOB had moved its duration to near-zero (via selling Japanese government bonds) to help limit the impact of rising rates. Since then, bond valuations look increasingly appealing, with the yield of global bonds – as gauged by the Bloomberg Barclays Global Aggregate Index – surging to levels not seen in 2009 (Figure 1). Alongside this trend, the fund has increased its duration exposure to 4.3 years through long positions mainly in the US (Figure 2).
Figure 1: Bonds are offering more attractive yields today
Figure 2: The fund is mostly exposed to US duration
Steering towards quality in a risk-off environment
The Allianz GOB believes that credit asset allocation and the ability to navigate through short-term risks are key drivers of long-term returns.
Its portfolio risk is allocated across different credit assets: Developed Markets, Emerging Markets (maximum 30% of portfolio), Investment Grade Credit, and High Yield (maximum 20% of portfolio). The allocation is determined by the factors below.
Global growth: During periods of weak economic growth, the fund’s credit asset allocation will gravitate towards developed market government bonds as markets become risk averse. Meanwhile, during periods of strong global growth, it generally expects credit markets and emerging markets to do well.
Interest rates: The shape of the yield curve is also important to the allocation decision. Positively shaped curves are generally good for risky assets while inverted curves, like the one we see today, are typically negative for risky assets. Hence, in periods where curves are, or threaten to be inverted, the fund’s allocations steers towards developed market government bonds.
Inflation: The fund looks at the prospects for inflation across the world to determine whether bonds as a whole represent good value.
The aforementioned factors could likely explain the Allianz GOB’s current sizable position in government bonds (Figure 3), with an average portfolio credit quality of AA-. Additionally, we note that the fund is relatively concentrated in some markets such as the US, as compared to the traditional fixed income benchmark Bloomberg Global Aggregate Bond Index (Figure 4).
Figure 3: The fund pivots towards government bonds in a risk averse environment
Figure 4: As an unconstrained strategy, the fund’s allocation varies significantly from a traditional benchmark
Another determinant that the fund considers is event risk. Events which might affect its allocation range from elections, geopolitics to private equity buyout trends.
Lastly, managed separately from the credit asset allocation, we would like to highlight that the Allianz GOB undertakes currency positions to maximise returns of the portfolio (i.e. active currency overlay to deliver “alpha”). Notably, it is long Japanese yen (JPY) versus the Canadian dollar (CAD). The JPY has significantly weakened year-to-date and may have scope to consolidate as the market stabilises and when the Bank of Japan potentially transits to a more balance policy mix in the future (Figure 5). Meanwhile, the domestic stresses in Canada, such as the cooling property market, makes the CAD an attractive funding currency. Additionally, the fund holds a bearish view on the euro amidst concerns about European energy security crisis dampening growth.
Figure 5: The fund finds opportunities in FX
The fund stacks up well against peers
Since inception, the Allianz GOB has significantly outperformed the traditional global bond benchmark Bloomberg Global Aggregate Bond Index. The fund’s duration positioning over the past year has played a big part in said resilient performance.
Relative to notable unconstrained bond funds on our platform, the fund’s performance was generally on par – as unconstrained bond strategies were generally able to deliver decent as well as better returns than traditional benchmarks over the long-term (Figure 6).
Figure 6: Unconstrained strategies have outperformed
While the JPMorgan Global Bond Opportunities delivered better cumulative returns, it is less consistent than the Allianz GOB (Table 1). The JPMorgan Global Bond Opportunities also falls short in the area of risk management – which we think really matters for bond funds as they are meant to serve as a portfolio diversifier.
Table 1: Returns by calendar year
|
Calendar Returns (%) |
2017 |
2018 |
2019 |
2020 |
2021 |
YTD |
|
5.4 |
-1.8 |
7.1 |
6.2 |
-2.5 |
-7.5 |
|
|
4.1 |
-1.2 |
7.1 |
5.7 |
0.0 |
-7.7 |
|
|
5.9 |
-2.6 |
10.2 |
7.1 |
0.8 |
-9.8 |
|
|
2.1 |
0.0 |
6.7 |
3.5 |
-1.5 |
-7.5 |
|
|
In USD terms Source: Bloomberg Finance L.P. Data as of 6 October 2022 |
||||||
Meanwhile, the Allianz GOB stands out in terms of its risk management characteristics. Given a robust strategy that shifts towards safer and shorter-dated credits during times of uncertainties, the fund offers relatively better downside protection. In particular, it has shown one of the lowest maximum drawdown results among peers (Figure 7). The fund also experienced relatively lower downside volatility, suggesting that its returns have been fairly consistent even during a market drawdown (Figure 8).
With its decent returns and better risk management characteristics, the Allianz GOB shines for its portfolio diversification benefits. In fact, the fund has only shown a correlation of 0.14 with the MSCI AC World Index, implying that its returns have little correlation with equity markets.
Figure 7: Its maximum drawdown is one of the lowest among peers
Figure 8: Volatility is also one of the lowest
Final thoughts
All in all, we believe that investors should look beyond traditional bond strategies which lack the ability to adjust to the ever-changing market environment. Unconstrained bond funds can fill this gap as they are able to react quickly to changes in market circumstances, while striving to seek out the best opportunities from global fixed income markets.
We like the Allianz GOB fund as it has continuously delivered a resilient performance while offering downside protection. With a low correlation with equities, the fund fits well in a multi-asset portfolio.
Investors can also look forward to a steady stream of income as the Allianz GOB pays out dividend on a monthly basis. Its portfolio is yielding at 3.5% (as at end-August 2022), beating out interest rates available on saving accounts. While investors are free to express their currency views, we recommend the SGD-H share class for Singaporean investors to prevent their yield from being eroded by currency movements.
All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).
iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.