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Fund in Focus: Global Bond

In our latest episode of the Fund in Focus podcast, Nick Peters gets an update from Niall McDermott about the Global Bond fund.


Fund in Focus: Global Bond


[00:00:00] Nick Peters: Hi, my name's Nick Peters, investment advisor at Marlborough Group, and today I'm joined by Niall McDermott, fund manager for Marlborough's Global Bond Fund. Hi Niall.

[00:00:18] Niall McDermott: Hi Nick, great to be here.

[00:00:20] Nick Peters: Thank you for joining us.

[00:00:22] Nick Peters: A gentle opener, asset allocators wondering how to allocate to bonds, why should they consider the mixed bond solution?

[00:00:30] Niall McDermott: To answer this, it's probably worth casting your mind back over where bond markets have come from and looking at where they are now. So following the high interest rates in the 80s, and that was as a response to rather rampant inflation in the 1970s, interest rates then fell for around 35 years as technological improvements and globalisation kept a lid on inflation.

[00:00:56] Niall McDermott: So this meant that when there were times of turmoil, rates were able to be cut easily and money was relatively cheap to support economies, meaning that both interest rates and then yields trended lower and lower.

[00:01:11] Niall McDermott: The Covid pandemic however, that saw economies not all move together for the first time in decades really.

[00:01:19] Niall McDermott: So there were varying policy measures to that and speeds of opening, specifics also of each economy, and what that meant is we're seeing more divergence between economies.

[00:01:33] Niall McDermott: Inflation wasn't really transitory as had been touted by central bankers and rates ultimately had to rise as a result. So what that means for bond portfolios, well essentially, diversification, diversification, diversification.

[00:01:50] Niall McDermott: Investors need to look globally, to not only take advantage of the full opportunity set, but also to manage risk.

[00:01:59] Niall McDermott: So something that we at Marlborough think is vital, is that bonds should be a defensive asset class. The natural pool to then

hunt for this exposure, it needs to be global and it should offer investors consistency and a degree of stability.

[00:02:17] Niall McDermott: Therefore, I'd suggest looking at the global mixed bond sector for this allocation. as the performance on average is consistent.

[00:02:25] Nick Peters: Okay, thank you, and you mentioned that, you know, in a balanced 60:40 portfolio, bonds 40 percent considered the defensive side of that portfolio. How does the Marlborough Global Bond Fund produce that defensiveness?

[00:02:37] Niall McDermott: As I've alluded to, If you look at the average performance of the global mixed bond sector against other bond sectors, the performance is consistently in the middle. And this consistency is something that I think investors should consider for a core global bond allocation. That, in a nutshell, is the ethos of Marlborough's Global Bond Fund.

[00:03:01] Niall McDermott: In other words, we're cautiously managing risk and we're not shooting the lights out one period to then give it back the next. If you, though, look at the funds within the sector, it becomes quite clear that the IA global mixed bond sector is pretty diverse.

[00:03:18] Niall McDermott: It's literally a mixed collection of bond funds with different strategies, targets, positioning, and that means a fund performing well one period might not do well when conditions change.

[00:03:31] Niall McDermott: And what's more is if you try and blend funds together, you end up running unintended risks. Marlborough's Global Bond Fund takes a different approach.

[00:03:41] Niall McDermott: So by first analysing and evaluating that peer group, we build up a picture of neutral, around which we take small risk managed active positions.

[00:03:53] Niall McDermott: So this does the legwork, essentially, of producing the median consistent performance of the sector, which I've mentioned before, whilst also not being a passive strategy.

[00:04:06] Niall McDermott: So active decisions are taken on credit quality splits, for example, duration management and currency, and that's in order to generate incremental return over time, but with a real focus on risk.

[00:04:19] Niall McDermott: So packaged up, the fund basically seeks to be an investor's core allocation to global bonds.

[00:04:27] Nick Peters: And interestingly, I'd have thought such approach would actually lead to quite a lot of turnover to try and maintain that position in the middle of the pack, if you like, but actually the fund incorporates a low turnover approach, but they're more active around government bonds and currencies.

[00:04:43] Nick Peters: So can you just give a bit more colour on that, please?

[00:04:46] Niall McDermott: Sure, absolutely. So as a foundation to our process, as you've said, the fund runs [a] fairly high diversified core portfolio of predominantly buy and maintain investment grade corporate bonds.

[00:05:00] Niall McDermott: So with bonds, management is really to the downside, as there's a known upside when a bond is bought, so to manage the individual company risks, what the strategy does is it holds a wide range of bonds. across geographies, credit and duration and that's selecting from a filtered pool of quite well researched names.

[00:05:23] Niall McDermott: So typically the goal is to hold a corporate bond until maturity and that's to reduce costs associated with dealing.

[00:05:32] Niall McDermott: But as this mix of corporate bonds has then different duration structure and currency from neutral, we're using liquid government bonds to both manage the duration and bond currency of the portfolio.

[00:05:46] Niall McDermott: You'll also notice if you look at the IA Global Mixed Bonds sector, there's many funds in there that are hedged.

[00:05:53] Niall McDermott: So we overlay a currency strategy. to both manage FX risk as well as opportunity. So every decision is basically taken within a risk framework. So we're predominantly focusing on risk and we're always considering the neutral position of peer group essentially it's a cautious strategy.

[00:06:14] Nick Peters: So the fund is described as unconstrained but do you invest beyond government bonds and credit?

[00:06:20] Niall McDermott: In a word, no. So the funds run as a measured and conservative global bond strategy and beyond currency forwards,

investments are primarily in government bonds and credit, within which there's a bias for high quality names.

[00:06:37] Niall McDermott: So the fund, as you say, is unconstrained, so the ability's there, but the ethos is cautious.

[00:06:44] Nick Peters: Okay, excellent, so that, that gives us, um, a great understanding of the, the fund itself. So let's, let's perhaps just look outward. For the last couple of questions.

[00:06:53] Nick Peters: Can you see us going back to a period of ultra low interest rates? You know, we've obviously seen them increase very recently, can we go back to that period when there's a lot of liquidity in the market and interest rates at historic lows?

[00:07:08] Niall McDermott: Well, I'd never say never but unless we essentially see economic activity nosedive, then I'd view it as a pretty unlikely scenario, especially in the near term.

[00:07:19] Niall McDermott: So it's always difficult to precisely point at where the natural level of interest is in an economy, but at the moment it looks like economies are handling these higher rates reasonably well, so it's safe to assume this natural rate is a bit higher than before.

[00:07:37] Niall McDermott: It's been, I guess you could say, quite a difficult adjustment for some investors. There's been some anchoring to this lower for longer mentality, which is post the 08 financial crisis, but I think COVID has changed that.

[00:07:53] Niall McDermott: We've seen more divergences, we're seeing a bit of deglobalisation, and there's a lot of trade fragmentation as well. That's essentially brought inflation back to the table and it's essentially keeping rates higher than where they have been.

[00:08:10] Niall McDermott: That said, looking in the next year or so, there are going to be rate cuts from where we are currently, but I don't think they're going down to these ultra low levels of the past, as I've said, this natural level of interest rates are higher than they have been before.

[00:08:27] Nick Peters: And I guess those higher levels, that sort of goes back to what you were saying earlier about bonds then becoming a diversifier in investors portfolios.

[00:08:38] Niall McDermott: Yes, essentially. So if I look back how the last year has gone, 2023, there was quite a dramatic end to 2023.

[00:08:48] Niall McDermott: So my gut feeling there was the markets were getting a bit ahead of themselves, expecting rate cuts to be just around the corner. But if you actually looked at the data, and this is especially in the US, It just kept printing strong after strong results, and that's not really an environment where central bankers are keen to cut into.

[00:09:08] Niall McDermott: And they basically won't want to pay the price in the future for cutting too soon. And they want to keep the ammunition of rate cuts dry, essentially, for if things get bad. So I think it's only natural that we've seen a readjustment upwards in yields.

[00:09:26] Nick Peters: And looking out six to 12 months, what can holders sort of expect from a performance perspective?

[00:09:31] Niall McDermott: So during this period of readjustment upwards in the beginning of this year, the fund's been positioned modestly short duration.

[00:09:40] Niall McDermott: Now it's actually looking as quite an attractive entry point again for bonds. So we've been moving gradually longer, obviously there's going to be some tactical positions along the way as markets tend to overreact to this new information and they're very much still trying to figure out when rate cuts are going to happen and it's all very changeable with each data point.

[00:10:04] Niall McDermott: The other, I suppose, exciting thing this year is the sheer number of political elections. It's roughly half the world's population that's going to be voting. So this means there's going to be a lot of volatility really, as there's a lot of unknowns.

[00:10:21] Niall McDermott: Again, this is sort of providing opportunities, but I think it also stresses the importance of diversification.

[00:10:29] Niall McDermott: So whilst overall I think it's a great time to be considering bonds. I do stress that I think investors need to be looking globally, but bond yields at the minute on offer are looking really attractive.

[00:10:42] Nick Peters: Okay, thank you. So that leads quite nicely to my last question, which is why Marlborough Global Bond now?

[00:10:48] Niall McDermott: So as I've mentioned, if you look at some of the economic data we've been seeing, we've seen a lot of divergences between economies. So whilst I think it's vital to have an allocation to bonds, diversification is really the key to ensuring that risks are properly managed.

[00:11:07] Niall McDermott: What I think investors should ultimately want from their bond allocation is essentially a sleep at night strategy.

[00:11:14] Niall McDermott: There's enough things to worry about without worrying about your bond performance being very volatile, and I think that's really our niche.

[00:11:22] Niall McDermott: So Marlborough Global Bond is focused on risk and maintaining performance versus the peer group. We're not swinging for the ceiling and hitting the floor, but rather we're seeking to deliver consistent, incremental performance over time. It's very much steady as she goes.

[00:11:41] Nick Peters: An excellent summary. Thanks very much Niall for joining us.

[00:11:44] Niall McDermott: Thank you very much, Nick.

[00:11:46] Niall McDermott: That was Niall McDermott, Fund Manager for Marlborough's Global Bond Fund, and if you'd like to find out more information about the fund, please go to our website,

[00:11:57] Niall McDermott: Thank you.