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

A series of events took their toll on global risk appetite during January, including heightened concerns over Greece, earlier-than-anticipated tightening in China, and a surprise announcement in the US of new regulations for the banking sector.

As a consequence, global bond yields declined, both in response to the heightened risk environment and also as a correction to the sharp rise in yields during December.

The European government bond market underperformed the US Treasury market as sovereign risk concerns erupted as a result of the fiscal crisis in Greece. Fears that contamination from Greek woes could move to other weak European Monetary Union sovereigns gripped the market.

Notwithstanding the events of the past month, we believe that the global economic recovery will remain on track. First, even as markets digest the impact from Chinese monetary tightening, global liquidity remains abundant. Second, a resolution on the Greek situation within the European Union/European Monetary Union should help global risk aversion decline. Indeed, the incentive for both peripheral and core EU countries to find a solution in the near-term is overwhelming. Third, while bank de-leveraging may intensify amidst tighter regulations, the additional drag on global growth may be muted as monetary policy remains loose for longer.

These factors broadly translates into a landscape characterised by higher global government bond yields on a strategic basis. There will still be opportunities though to add value from a long duration posture as the aforementioned bouts of risk aversion occur. Furthermore, there will be times when the investment community becomes overly wedded to the reflationary theme which is likely to lead to sharp corrections along the way.

The outlook for Sterling is decidedly mixed depending upon the trading partner under consideration. It is very cheap versus the Euro and hence, is likely to strengthen against its continental cousin on a trend basis this year. Versus the US dollar it has further to weaken as the whole European bloc of currencies is overvalued against the US. Given the recent rise in risk premiums within the Eurozone, Sterling has been tarred by the same brush and looks likely to decline further. Indeed, the Fund added substantial value in January as currency hedges into Sterling were sharply reduced.