Although investors routinely diversify their equity exposure on a global basis, it is less commonplace for those seeking exposure to bonds.
Mike Riddell, a member of the extensive fixed-interest team at M&G, finds this strange.
He said: “Our International Sovereign Bond Fund excludes UK Government bonds, so you would buy it if you are worried about sterling.
“The global government bond market is broadly 25% US Treasuries, 30% Japanese government bonds and 40% European government bonds, with the balance made up of various other issues.
“We’re not constrained by this benchmark although we are aware of it.
“At the moment, the fund’s US and Japanese positions are very underweight compared to the benchmark – as we believe that neither of these bond markets nor the US dollar and yen are attractive.
“Consequently we’ve taken an 8% position in Australia and 3-5% positions in Poland, Norway, New Zealand and Canada, since these economies are much healthier than countries that have been smashed by the banking crisis.”
Mr Riddell said almost 40% of the fund was in European government bonds. “We’re happy having such a large exposure to Europe. The euro has been strong and inflationary pressures are non-existent there. Broadly speaking, we don’t see any problems with inflation until the banks start lending again – which still seems some way off. We do have around 13% of the fund in inflation-linked bonds, mainly in the US and Australia.
“This actually isn’t because we’re worried about inflation; but because the inflation-linked bonds are cheaper than traditional bonds in some markets and give us a generous yield.
“Obviously we monitor this situation closely and, if we were concerned about inflation, we could significantly increase the proportion of inflation-linked bonds in the portfolio, although that isn’t really what the fund is about.”
The fund performed spectacularly during the 2008 calendar year with a return of 57.6%. The relative strength of sterling so far this year means that results have been less spectacular, with the fund having fallen by 10.2% to earlier this month.
Mr Riddell said: “Investors need to understand what they are buying.”
A global bond fund which excludes UK exposure provides a hedge against sterling doing badly, but will underperform when it is strong.
Barry O’Neill is a chartered financial planner with Thomson Shepherd and can be contacted on 01224 619215.