Bond funds are supposed to be dull. Slow, steady returns. Something you turn to when you need a “safe haven.” So how has the Signature Global Bond Fund managed to generate annualized returns of 7.0%, 8.1% and 6.5% over 1-, 3- and 5-year time frames respectively through January 2016, and do it primarily with low-coupon government bonds? And what about that 2.8% return for the month of January alone?
Government debt in most of the developed world has been pretty much flat-lined for the past seven years at 1%-2%-3%, with few rate reductions to trigger capital appreciation (except recently in Europe and Japan). In fact, the U.S. Federal Reserve raised its key rate in December 2015 (to 0.50% from 0.25%, the highest it’s been since 2008) – an inauspicious development for U.S. bond holders, at least in theory.
One month after the Fed hiked its rate, though, this fund generated a whopping 2.8% monthly return, despite the fact that almost half its portfolio is U.S. debt (20% is Asian and the balance European; only 12% of the portfolio is corporate bonds).
So how come?
Kamyar Hazaveh, portfolio manager at Signature Global Asset Management (a division of CI Investments) in Toronto, explains that his fund has benefited from the confluence of two major developments – the loonie’s fall from grace, and the impact on long-term yields of continuing global economic sluggishness.
On the currency front, the Canadian dollar has been declining against U.S. as well as most other currencies since 2012, and that has translated into higher returns for any unhedged fund invested outside Canada. “CAD depreciated against all the currencies in our portfolio,” Hazaveh notes.
Meanwhile, long and short-term bond yields have diverged of late. “Long bond rates have been falling for two years now,” says Hazaveh, and points to the U.S. 10-year bond rate having fallen 0.4 percentage point just between the beginning of 2016 and late February. “Long bonds globally have also been making new lows in Europe and Japan, obviously, and in Canada,” he adds.
That’s meant more capital gains for fixed-income investors, and Hazaveh points out that with terms as long as 30 years, those gains can be substantial. “If you look at [recent] yields from German Bunds, for example, the capital gains portion was 13%-14%.”
And Hazaveh sees more gains coming, notwithstanding that U.S. uptick. “The market [through lower long-term rates] sees the Fed hike as a policy mistake,” he says. “The U.S. and global economies are not strong enough, and the market is telling them to stop and reverse that policy mistake.
“Recent releases on trade, commodities, supply and demand, global activity are on a downtrend,” Hazaveh adds. “Higher U.S. rates and currency will kill commodity producers, hurt emerging markets, it will result in job losses and recession....The market response makes more sense than the Fed’s.”
Given the circumstances, Hazaveh sees global long bond yields falling even further in 2016 despite the Fed move, to the benefit of all fixed-income investors. In response, he’s overweighed the fund’s U.S. long bond holdings (“as the Fed backs off, yields have room to fall”) and taken “substantial positions” in 20-year Japanese and 30-year French and German bonds.
Portfolio duration is growing, and the currency outlook has changed too – if the Fed does back off as Hazaveh foresees, the U.S. dollar will have room to fall. “CAD may have an upside, so we’re managing the downside more actively,” he says.
Hazaveh advises that while returns have been robust, however, the fund is positioned as a complementary rather than core component for the average portfolio. “Our position is very aggressive, and it’s very potent when the economy is weak,” he says. “Last year was a good example – the markets didn’t do well, and commodities collapsed. We recommend this fund as a diversifier if you’re holding equity risk, maybe 10% to 20% of your portfolio to protect the downside.”
Olev Edur is an experienced financial and business journalist and a frequent contributor to the Fund Library.
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