Strategic Global Bond Fund

Key points

• The fund has a “sophisticated” UCITS III structure and risk management processes
• Management responsibility for the fund was taken over by Mark Astley of Millennium Global Investments on 13 September 2006
• Sector: IMA Global Bonds

Current views

The global risk environment deteriorated further, with a sharp sell-off in US equities, additional pressures on sovereign bonds at the periphery of the Eurozone and heightened concerns surrounding the banking sector. The weakening of the US recovery led to a re-assessment of the outlook for Federal Reserve interest rate policy.

In Europe, the increased reliance of Greek but also Portuguese banks on ECB financing and the expiration of the ECB 1-year refinancing operation at the end of the month kept alive concerns about banking sector funding. Meanwhile, the cyclical story in the Eurozone proved more solid than expected as continued positive economic surprises were delivered.

US and UK yields fell sharply in the second half of the month as investor risk aversion led to a flight to quality as developed equity markets fell to their lows for the year. US 10-year yields breached the 3% level for the first time since April 2009 with UK gilt yields breaching 3.35%, almost 100 basis points below the recent peak of February this year. The slowing domestic business cycle in China and concerns over its global impact exacerbated the move.

The pendulum has swung sharply from late winter/early spring convictions about the perceived global inflation threat to renewed anxiety concerning the fragility of developed economies post-crisis and whether emerging market robustness can be maintained. We believe that the multi-month declines experienced in global bond yields have gone about as far as they can go and the risk reward now favours higher yields during 2H 2010. Corporate earnings are strong, policy is extremely easy and the steepness of global yield curve, arguably the most reliable indicator of the cyclical economic outlook, suggests that while conditions are not as rosy as during Q1 2010, a double-dip into recession in 2011 is highly unlikely.

With respect to currency moves, Sterling has risen dramatically versus the Euro strengthening by over 20% from the lows of December 2009. However, it has now unwound all its prior undervaluation, discounted all the fear premium over the UK election and benefited fully from the well received austerity budget. We believe that now is a good time to unhedge Sterling exposure versus the Euro and this is expected to be a source of return in coming months.