According to figures from Trustnet, the top two performing global bond funds over the year to 16 October in the ABI Global Fixed Interest sector, the Zurich Invesco Bond and the UBS Life Overseas Fixed International Bond, have returned 26.2% and 23.5% respectively. Funds offered via Scottish Equitable, Axa SunLife, Clerical Medical and Phoenix have also posted attractive returns above 18%. All these funds are available via insurance bonds.
Colin Finlayson, fixed income fund manager at Aegon Asset Management, says government bonds have benefited as investors have sought shelter from the credit crisis fall-out. Finlayson manages the Scottish Equitable Foreign Bond/Currency fund, which has returned a healthy 19% over 12 months to 16 October, compared to an average return of 3.7% in the ABI Global Fixed Interest sector.
"The ‘flight to quality’ we've seen in the last 12 months – out of equities and corporate bonds – has led to strong positive returns on government bonds." Finlayson says:
"In the last year the fund has benefited from being 100% invested in overseas government and government guaranteed bonds at a time when riskier assets have underperformed. By avoiding any spread risk through corporate bonds the fund will most likely have outperformed any peers that held any additional credit risk."
The Scottish Equitable Foreign Bond/Currency fund invests predominantly in G-10 government bonds, with the bulk of this held in US Treasuries and Japanese and European governments.
Scottish Equitable Foreign Bond/Currency performance:
Finlayson says within government bonds performance over the last 12 months has been driven by exposure to European governments, particularly core markets like Germany.
"The biggest component of the fund is in European governments at a time when the Euro has been strong, particularly against Sterling and the Dollar. This is another driver of the fund’s performance in the last 12 months or so."
Mark Dampier, head of research at Hargreaves Lansdown, said recently - before the emergency measures to fund capitalisation of UK banks - that the flight to quality seen over the last year is likely to continue as problems in credit markets continue to unwind.
In the UK, Dampier says he expects interest rates to drop over the next 12 months, which should prompt government bond yields to tighten further. However, he says demand could be tempered by British government plans to sell around £100 billion of gilts over the next 12 months to fund public borrowing.
“People are putting their money into government bonds because it is the closest thing to a risk free return. This is going to continue. 2009 in the UK will be a full recession for all four quarters. The problems we have got today will take a long time to sort out, probably well into 2010.”
Investors appear to agree. Pete Davis, funds development director at Zurich UK Life, says insurance bond investors have been channelling money into less risky assets lately. Four of the global bond funds Zurich offers via its investment bond sit in the top-10 funds in the ABI Global Fixed Interest sector over one year, as of 16 October figures. The top fund, the Zurich Invesco Bond, is run by Invesco Perpetual, while the other four are managed by Threadneedle Asset Management.
"Over the last twelve months we have seen a movement in general terms from equities and property into fixed interest funds as well as cash and government bonds. We have also seen a general shift into UK assets, with consumers choosing to invest in a larger proportion of UK assets whilst retaining a small proposition of European and global assets," Davis says.
But, not all global bond funds have performed well recently, indicating investors need to look carefully at the underlying portfolio before investing.
The worst performing fund, the Royal & Sun Alliance SA International Bond lost some 37%, while the Skandia Finland Akseli Global Balanced fund, lost 29%, and a number of others shed similar amounts.
Royal & Sun Alliance SA International Bond:
