23 Apr 2019
April 2019
Volatility in global markets has picked up over the last six to nine months. Iain Stealey, manager of the JPM Global Bond Opportunities Fund, looks at how the fund’s disciplined, dynamic approach is helping it to navigate this more uncertain environment.
With growth healthy throughout 2018, particularly in the US, we were content to hold high yield. Companies were in robust health, with default rates very low, leverage being used responsibly and corporate earnings solid.
When the market began to question the growth outlook in the fourth quarter, resulting in a sustained correction for risk assets, we held on to our allocation, maintaining the discipline of our FQT (fundamentals, quantitative valuations, technicals) research process.
Fundamentals: While macroeconomic uncertainty had increased, corporate fundamentals remained strong, so we expected a recovery once the market stabilised.
Quantitative valuations: The severity of the spread move— almost 200 basis points between the end of October and the end of December—suggested the selloff was overdone.
Technicals: Liquidity had dried up in the rapid selloff, compounding the spread widening and making us even more reluctant to lock in losses. On a forward-looking basis, we were comfortable with technicals, given that the majority of high yield companies had already pre-funded their 2019 needs.
Staying invested paid off: high yield has accounted for the majority of returns in the fund year to date, and we have more than recouped the fourth-quarter underperformance.
That said, given the strength of the rebound, we have now begun to reduce our high yield allocation. Fundamentals are still good, but we do not expect spreads to get back down to previous levels given the advanced stage of the market cycle, so we are taking some profit to lock in the strong performance.
As well as discipline, dynamism is also a central tenet of our process. While we were holding steady on high yield, our flexible approach to duration positioning benefited performance.
Until the fourth quarter of 2018, we had been short US Treasuries, reflecting our view that the market was underpricing the likely path of Federal Reserve rate hikes, given the strength of growth. This view was borne out, with the 10-year Treasury yield rising from 2.4% at the start of 2018 to over 3.2% by mid-October, contributing meaningfully to the fund’s performance.
At these levels, and with the pace of the hiking cycle becoming less clear and global growth beginning to show increasing divergence, we believed it was prudent to add some duration, which would also serve as ballast to our relatively high-risk portfolio positioning. We began adding duration to the portfolio when the 10-year yield was above 3%, moving net-long US Treasuries over the course of the fourth quarter and increasing the fund’s headline duration.
The market selloff from mid-October saw Treasury yields move down through the 2.7% level, and the 10-year is now back around the 2.4-2.5% level, reflecting the more uncertain macro environment and the increasingly dovish Fed.
Source: Bloomberg, J.P. Morgan Asset Management; data as of 31 March 2019.
Dynamic Treasury positioning has contributed positively to the fund’s performance throughout a difficult period for markets. At the same time, the discipline of our FQT research process helped us to benefit from the rebound in risk assets such as high yield.
This supports the case for Global Bond Opportunities Fund as a dynamic, global, “best ideas” fund well-placed to help investors weather environments of increased uncertainty.
Take a disciplined, dynamic approach to the opportunities in bond markets around the world with the Global Bond Opportunities Fund. The fund targets attractive risk-adjusted returns in different market and interest rate environments by providing flexible, high-conviction exposure across 15 fixed income sectors and over 50 countries.
Investment objective
To provide income and long-term capital growth by investing opportunistically in an unconstrained global portfolio consisting primarily of fixed and floating rate Debt Securities.
Positive returns are not guaranteed and the Fund should not be used as a substitute for traditional liquidity funds or cash accounts.
The Fund is unconstrained and opportunistic which may result in periods of high volatility.
Bond funds may not behave like direct investments in the underlying Bonds themselves. By investing in Bond funds, the certainty of receiving a regular fixed amount of income for a defined period of time with the prospect of a future known return of capital is lost.
The value of Bonds and other Debt Securities may change significantly depending on market, economic and interest rate conditions as well as the creditworthiness of the issuer. Issuers of Bonds and other Debt Securities may fail to meet payment obligations (default) or the credit rating of Bonds and other Debt Securities may be downgraded. These risks are typically increased for Below Investment Grade and certain Unrated securities which may also be subject to higher volatility and be more difficult to sell than Investment Grade securities.
Investing in Contingent Convertible Securities may adversely impact the Fund should specific trigger events occur (as specified in the terms of the security) and the Fund may be at increased risk of capital loss. This may be as a result of the Contingent Convertible Security converting to Equities at a discounted share price, the value of the Contingent Convertible Security being written down, temporarily or permanently, and/or coupon payments ceasing or being deferred. Convertible Bonds are subject to the credit, interest rate and market risks associated with both Bonds and Equity securities, and to risks specific to Convertible Securities. Convertible Bonds may also be more difficult to sell than the underlying Equity securities.
The value of Equity and Equity-Linked Securities may fluctuate in response to the performance of individual companies and general market conditions.
The Fund’s use of equity derivatives to manage the portfolio’s correlation to equity markets may not always achieve its objective and could adversely affect the return of your investment.
Emerging Markets may be subject to increased political, regulatory and economic instability, less developed custody and settlement practices, poor transparency and greater financial risks. Emerging Market currencies may be subject to volatile price movements. Emerging Market securities may also be subject to higher volatility and be more difficult to sell than non-Emerging Market securities.
Bonds and other Debt Securities with a lower credit rating may have a higher risk of defaulting which may in turn have an adverse effect on the performance of Funds which invest in them.The Fund may use Financial Derivative Instruments (derivatives) and/or forward transactions for investment purposes. The value of derivatives can be volatile. This is because a small movement in the value of the underlying asset can cause a large movement in the value of the derivative and therefore, investment in derivatives may result in losses in excess of the amount invested by the Fund.
The possible loss from taking a Short Position on a security (using Financial Derivative Instruments) may be unlimited as there is no restriction on the price to which a security may rise. The Short Selling of investments may be subject to changes in regulations, which could adversely impact returns to investors.
The Fund may have a significant exposure to Asset and Mortgage Backed Securities (ABS and MBS). ABS / MBS may be difficult to sell, subject to adverse changes to interest rates and to the risk that the payment obligations relating to the underlying asset are not met. The Fund may be concentrated in a limited number of securities, industry sectors or countries and as a result, may be more volatile than more broadly diversified funds.
Bond funds will normally distribute a combination of Coupon and the expected discount/premium on the securities. Therefore, a Fund’s distribution will comprise income received and an element of projected capital gains or losses. This could result in an element of capital gain being taxed as income in the hands of an investor.
To the extent that any underlying assets of the Fund are denominated in a currency other than Sterling and are not hedged back to Sterling, movements in currency exchange rates can adversely affect the return of your investment. The currency hedging that may be used to minimise the effect of currency fluctuations may not always be successful.
The Fund may invest in Structured Products which will involve additional risks including the movements in the value of the underlying asset and the risk of the issuer of the Structured Product becoming insolvent.
The Fund may invest in Credit Linked Notes which involve the risk of the underlying credit instrument decreasing in value or defaulting and the risk of the issuer of the Credit Linked Note becoming insolvent.