Ian Kelson, lead portfolio manager for T. Rowe Price’s Global Aggregate Bond fund, believes in searching the whole fixed income universe to try and find value, “wherever this might be”. And looking at the fund’s performance, it seems the strategy used is working pretty well. According to data from Standard & Poor’s, the fund was top performer in the global fixed income category over three years.
Mr Kelson bases his strategy for adding value in the fixed income arena on four key factors: the choice of currency, the choice of country, the allocation of credit and issuer selection. “Over time we would expect each of those to contribute 25 per cent to our total added value and the idea is to very much diversify our sources of alpha across those four categories.”
The fund is measured against the Lehman Brothers Global Aggregate Bond index which has 50 per cent going to governments bonds with the other half being split between agencies, mortgage and corporate bonds.
“But as well as investing in that index, which is purely investment grade, we can also go into high yield and emerging debt so we do have a very wide investment universe.”
The portfolio of this Luxembourg Sicav has been slightly changing since it was launched in 2001, although investment in the US still represents the largest part of its portfolio – around 43.4 per cent at the end of November last year.
“Last year we were quite negative on US bonds and we had significant positions in places like euroland, Canada and Mexico, all of which outperformed,” he says. “Now though, we think we are pretty much closer to the peak in the US interest rates cycles, so we have bought back a lot of those US bonds and taken profits on euroland and Canada.”
On top of this the fund has also gained exposure to other markets. “One of the big trends at the moment is to focus more on opportunities in some of the peripheral markets,” he says. “As well as growing towards the mainstream currencies like the euro or the Canadian dollar we have also established positions in a number of Asian currencies.” This includes the Chinese ‘renminbi’, the Philippine peso, the Indian rupee and some position in the Russian rouble and the Brazilian real.
“We are looking at a broad mixed of currencies to play the weak dollar theme. It’s
not simply the case of doing dollar/euro or dollar/yen.”
Also the fund has been favourably inclined towards emerging market debt, including exposure to the Middle East region in Lebanon and Iraq. “Both of these [positions] are dollar bonds so there is no currency risk, but they are paying a spread of 300 to 400 basis points over US treasuries,” Mr Kelson adds.
Apart from the exposure to government bonds across the world, the fund also invests a significant part of its portfolio in corporate bonds, that represents between 15 to 20 per cent of total assets.
“Right now we are relatively underweighting European corporates where we think yield spreads are tight and where there is a lot of M&A activity. But we still find quite good value in the US corporate market where spreads are much wider and earnings prospects still look pretty good,” he says.
Mr Kelson explains they are seeing a lot of demand for their products coming from institutions in different regions, especially from Scandinavia. “I think for them it is a way of getting more value in the fixed income part of their portfolios at a time when global bond yields are very low.”
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