More than half of the funds in the IA Global Emerging Market Bond sector and almost 30 per cent of those in the IA Global Bond sector have lost money over the past three years, according to research by FE Trustnet.
Within the whole Investment Association universe of 2,083 funds, 97 per cent are in positive territory over the past three-year period, although this has generally been a buoyant time for markets.
While all funds leverage risk in order to try and make a positive return over the longer term, three years is a widely viewed as the minimum indicator of a fund’s behaviour.
Those investors who were squirrelling away their cash in June 2012 in an Individual Savings Account (ISA) rather than putting it to work in the markets are now sitting on a 9.3 per cent return today, but 80 per cent of IA Global Emerging Market Bond funds and almost two-thirds of IA Global Bond funds failed to beat this.
The wider fixed income market has been increasingly stressed over this period, and especially so in recent months, thanks to both the presence and subsequent withdrawal of quantitative easing (QE) by the world’s central banks.
Bond yields, which are inversely correlated to prices, have been pushed lower by the wall of cash created by the Federal Reserve, Bank of England and latterly the Bank of Japan and European Central Bank, to the extent that in several European countries they turned negative to the bewilderment of many investors.
Performance of sectors over three years
Source: FE Analytics
David Jane (pictured), co-manager of Miton’s multi asset fund range, says that yields can only go up from their current historic lows and therefore their price will fall, creating a bad outlook for bond investors in the near future.
“The drive lower in bond yields over the past few years has been one of the defining characteristics of markets, driven by the combination of quantitative easing, declining inflation and demographics in the developed world. This has had a number of consequential effects, beyond government bond markets, in fact right across the investment spectrum,” Jane said.
This trend in the bond market has also been accompanied by a host of worries surrounding investing in emerging markets, in both bonds and equities, following the 2013 taper tantrum, several major political crises in the likes of Brazil and Russia and rapidly slowing economic growth in China and elsewhere.
Those that have suffered hardest over three years in the IA Global Bonds sector include the likes of $735m Pictet Latin American Local Currency Debt and £2bn GS Growth & Emerging Markets Debt Local Portfolio funds, which are clearly geared towards the downside when worries are high for emerging markets.
However, those with an overweight to US and German government debt are also notably present as these two markets have been some of the worst hit since markets started selling off in 2015.
Funds such as the £576m Newton International Bond has at had at least a quarter in US treasuries over the past three years, a period that has seen its assets under management shrink by 40 per cent.
Performance of funds and sector over 3yrs
Source: FE Analytics
Cross Border Capital’s latest report into liquidity in emerging markets points to further pressure in emerging market economies but there may be some support from the China’s central bank, which could bode well for funds investing in this part of the market.
“Four years of strong US liquidity have underpinned the more US-linked markets, like Mexico, Israel and the Philippines, but previously tight Chinese liquidity has hit many others, such as China directly and Brazil. India may uniquely stand apart. Our data shows these liquidity extremes are changing places,” it said.
“There is no question that the Chinese real economy is in a bad shape. We have warned as much for two years. Gross domestic product GDP growth is truthfully well-below 5 per cent and the real estate markets are skidding. To offset these negatives, the People’s Bank [PBoC] is now definitively easing policy. Note that the PBoC is one-fifth bigger than the US Fed and now the world’s largest central bank. Its liquidity has a major impact both domestically and regionally,”
“Our view is that the reality of Chinese monetary easing in 2015 will prove more important than the reduced prospects of US tightening. Based on latest liquidity data, emerging markets show over 70 per cent odds of being either in the favourable rebound or calm investment regimes –traditionally higher return, falling-volatility periods. Behind these conclusions are, slightly above par but slowly falling US liquidity, and fast rising Chinese liquidity."
In an article next week we will look at other parts of the market that have seen a rocky past three years.