Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors and the role your fund could play in an investor's portfolio? How do you structure this fund?
The IFSL Marlborough Global Bond fund gives investors global and diversified exposure to fixed income markets and seeks to generate outperformance through the cycle via active management of duration, credit, country and sector allocations, including via investments into high yield and emerging markets, as well as via active yield curve, inflation and foreign exchange (FX) strategies.
We take a long-term, unconstrained and macro-informed value-driven approach to investing and as such we seek to be a long-term fixed income solution for our clients, providing diversification, stability and income within their wider portfolio.
The fund itself has a stellar track record going back to its inception in 1987 and the incumbent management team of James Athey and Niall McDermott continue to manage the fund with the same core philosophy of active and unconstrained global fixed income investing pioneered by the fund's founder Geoff Hitchin. The fund has returned 37.19% over the 10 years to 30 September 2024 versus a peer group average return of 24.72%.
What do you see as the big opportunities and risks for your strategy?
We view the opportunities in fixed income markets today as very attractive, despite the presence of significant macro and geopolitical uncertainty. Indeed, it is the market's relative underpricing of some of the negative economic risks which significantly contributes to our current duration value assessment. That is to say that in an environment where the US equity earnings yield is nearly identical to the US 10-year Treasury yield, at a time when unemployment is rising and central banks are beginning to ease monetary policy, we adjudge core fixed income to be very attractively priced. We foresee several potential outcomes in which central banks will ease policy significantly – either to lock in the ‘soft-landing' gains or to stimulate their economies should activity deteriorate more significantly than is currently being anticipated. Of course, we recognise that there could be risks to bond investors should growth and, more pertinently, inflation reaccelerate. However, our assessment is that these outcomes are much less likely, given ongoing structural weakness in China and the Eurozone, and the unequal distribution of wealth and income in Western economies and thus the distribution of the burden of the previous inflationary episode.
Can you identify a couple of key investment opportunities you are playing at the moment in the portfolio?
We have been reducing overall exposure to corporate bonds, while increasing our core duration – particularly in Germany. This is because we have significant cyclical and structural concerns about the Eurozone economy and believe that these are being underappreciated by the European Central Bank and underpriced by financial markets. Furthermore, we have been increasing overall quality and moving up the capital structure – the seniority rankings that issuers use to prioritise debt payments – within our corporate bond portfolio. This is because we judge prevailing spreads to largely be inadequate compensation for the risks of lending to lower-quality borrowers. Within FX, we have significantly increased our US dollar weight to benefit either from a more hawkish pricing of the outlook for Federal Reserve policy or indeed a more significant deterioration of the economic outlook resulting in reduced risk appetite and a flight to quality – i.e. the wings of the ‘dollar smile'. We have also significantly increased our Japanese yen weight, which we view as historically and unsustainably cheap and likely to benefit from any deterioration in global risk appetite.
On the subject of Japan, we think that the ongoing evolution of corporate governance and subsequent focus on shareholder value, as well as the relative rise in Japanese government bond (JGB) yields and concurrent falling cost of currency hedging will result in a medium-term increase in domestic focus for large Japanese institutional investors. This will support a medium-term appreciation of the Japanese yen but should also support long-dated JGB prices. As such, as well as our long yen position, we have also been adding duration at the long end of the JGB yield curve.
James Athey is Co-Manager of Marlborough Global Bond at Marborough Group
