Fixed income assets have been on a stellar run over the past 12 months or so, which has come as a surprise to most industry experts.
Fears over headwinds such as economic woes in the eurozone, heightened geo-political risk in eastern Europe and the Middle East and equity market volatility have all contributed to falling yields across global bond markets.
According to FE Analytics, the average fund in the IA UK Gilts sector and the IA Sterling Corporate Bond sector have returned 14.26 per cent and 11.4 per cent respectively since January 2014 while the FTSE All Share has gained 7.09 per cent.
Performance of sectors versus index since Jan 2014
Source: FE Analytics
However, with 10-year gilts still yielding below 2 per cent, Metcalfe – investment director at iBoss – is now very bearish on the bond market.
“In our opinion what we have here is an asset [sovereigns] that are dangerously overvalued and that have the largest asymmetric risk in the form of potential and magnitude of gains, versus potential and magnitude of losses, we have seen for many years,” Metcalfe (pictured) said.
“We will continue to avoid sovereigns and we remain underweight conventional fixed income and will continue to be until there is at least some significant degree of potential upside.”
Most industry experts echo Metcalfe’s thoughts on the current bond market, as the recent BofA Merrill Lynch Fund Manager Survey found 79 per cent of respondents felt fixed income was overvalued and was likely to be the most volatile asset class in 2015.
However, the likes of Fidelity’s Kevin O’Nolan have been going against the grain and upping exposure to bonds as lower oil prices will put downward pressure on inflation, which will in turn keep a lid on bond yields.
Metcalfe, on the other hand, says it is inevitable that bond prices will fall from here and says one possible catalyst which would facilitate this move would be an increase in US interest rates – an event he expects to happen this year.
“The impact of this remains unknown because the Fed has not had to raise rates after this much QE and after such a protracted period of rates being kept on hold,” he said.
“When the move does come we expect the move in bond yields could be explosive though this could still be tempered if it coincides with negative global events which could be anything from terrorism to Ukraine to Greece or a black swan event of significant magnitude.”
Metcalfe added: “None of these events change the fundamentals, which are that bonds are extremely expensive in historic terms, and since that's the only part of the equation we can say with absolute certainty that will predicate our current positioning.”
Given his outlook on the bond market, Metcalfe isn’t a fan of the asset class.
However, he concedes that for the purposes of portfolio diversification and risk measures at certain adviser firms, there is still a need for fixed income funds. He and his team currently only use a select number of bond funds within their model portfolios and one of which is the Marlborough Global Bond fund.
Metcalfe rates the fund due to its experienced management team of Geoff Hitchin and Nicholas Cooling – who have worked together on the fund since 1998 after Hitchin (pictured) launched it in 1987 – and as it is nimble and highly flexible – its AUM is £80m and it sits in the IA Global Bond sector.
“The fixed income markets have been heavily influenced by the actions of the world's central banks and to be more specific the considerable level of money printing,” Metcalfe explained.
“Given the additional level of uncertainty in this regard we feel it is prudent to bring in a third global bond fund where appropriate into some of the portfolios.”
“The Marlborough Global Bond fund is managed by one of the most experienced pair of managers in the whole sector and they have achieved success over many years and in different market conditions.”
According to FE Analytics, the four crown-rated fund has been the best performing portfolio in the IA Global Bond sector over 20 years with returns of 342.25 per cent, beating the sector average by 170 percentage points in the process.
Performance of fund versus sector over 20yrs
Source: FE Analytics
Marlborough Global Bond has also beaten the sector over one, three, five, seven and 10 years as Hitchin and Cooling have outperformed their peers in seven out of the last 10 full calendar years.
Source: FE Analytics
“The Marlborough Global Bond fund aims to provide both income and capital growth by investing mainly in fixed interest securities,” Metcalfe explained.
“The fund will invest primarily in a broad range of fixed income securities traded on global markets. There will be a spread of both government and corporate fixed income securities with varying credit ratings and including at times other securities.”
“The overall approach is a cautious one, designed to capture upside whilst limiting the impact of falling markets, making the most of the unconstrained nature of the fund by holding a good spread of bonds, diversified by geography, credit rating and duration.”
The fund – which has been one of the sector’s best performers in terms of its annualised volatility and risk-adjusted returns, as measured by its Sharpe ratio, over 10 years – has a yield of 3.5 per cent and has delivered a high level of income to investors over the longer term.
Our data shows that if investors had bought £10,000 worth of units in Marlborough Global Bond 10 years ago, they would have since been paid £4,685.83 in dividends.
The managers’ highest credit weighting is to BBB bonds, which make up 35.4 per cent of the portfolio, and their more cautious outlook is highlighted in their 14.7 per cent cash position, which is one of the highest in the sector.
Its ongoing charges figure (OCF) is 0.46 per cent.