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STANLIB Global Bond Fund - News
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Stanlib Global Bond comment - Dec 11
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Friday, 23 March 2012
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Fund Manager Comment
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Performance and Strategy
We recorded our first quarter of slight underperformance since the crisis ended. What we gained on our duration and credit investments we lost on currency exposures. The biggest detractors from performance on the currency front were our large underweight positions in the yen and the euro. These were offset partially by our holdings in other currencies but not by enough. Our fixed income investments netted a solid performance with half the gains coming from our holdings of U.S. corporate credit.
Currency Strategy
Despite the strength in the euro and yen during the second quarter, our investment strategy continues to emphasize under weights in these major currencies with the biggest portion of portfolios allocated back to dollars and the British pound. Looking at the mess in Europe, it begs asking why the euro is still above U.S. $1.40 instead of trading somewhere below U.S.$1.30 or lower? Similarly, why is the yen not weaker with Japan's economy near a standstill, politics in disarray, the government intervening to stop the yen from rallying and the Bank of Japan intervening to buy equity ETFs in order to support the market? The 10-year CDS rate on Japanese government bonds (JGB) currently exceeds the yield on 10-year JGBs. The answer is that as bad as things are abroad, the dollar has been undermined by the dramatic contrast in the stance of the Federal Reserve with central banks in Europe and Japan. The ECB has been raising rates this year and shrinking its balance sheet; the Fed has been expanding its balance sheet. In addition, the failure of politicians to come to terms with public finances in the U.S. continues to undermine confidence in the status of the U.S. dollar as reserve currency with plenty of reports of countries attempting to diversify out of dollars. The dollar is clearly unloved. Under different circumstances, we would be even more invested in the U.S. dollar based on its pricing profile and macro factors. But the extreme stance of the Fed and budget gridlock have held dollar investors back. This is expected to change in the second half of the year. Confidence in the dollar could by buoyed dramatically if U.S. politicians are able to do what's right as Churchill predicted. As for a blueprint of what might be right, the President's own non-partisan commission on Fiscal Responsibility and Reform released a set of proposals at the end of 2010, which we found both sensible and credible. Therefore, policy divergences, which supported the euro in the first half should reverse in the second. The ECB should stop raising rates in the second half and may be forced to accept a lot of low-quality sovereign debt as collateral on emergency lending and not sterilize these purchases as it has done all year. In contrast, the Fed has ended its balance sheet expansion for the time being and set the bar very high for any new stimulus. We like the British pound. In many ways, it mirrors the same outlook as for the dollar. Its price has already weakened significantly relative to various benchmarks of value in line with the Bank of England's dovish line on supporting the economy in the face of extreme fiscal austerity. Easy money and tight fiscal policy are very negative for a currency. However, much of this appears already priced into sterling with Europe about to move in this direction. Our currency strategy has included a gradual reduction in exposure to many of the commodity currencies. Most of these currencies are extremely expensive by any yardstick other than commodity prices. Moreover, standard country analysis shows that in all cases the drag from the strong currencies is bigger than the terms-of-trade benefits pushing them higher. For example, real net exports are in deficit and monetary condition-type calculations show recession-like levels for New Zealand and Australia. Bull markets in these currencies are completely dependent on a sustained rally in commodities. However, our broader macro view about consolidation this year argues for a pause in this trend if not a more meaningful correction. We continue to pursue peripheral currencies where we see value and macro forces in support of strength. Currently, we own a basket of regional Asian currencies, which offer good long-term value prospects at a time when central banks in many of these countries are pre-occupied with fighting inflation.
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Stanlib Global Bond comment - Jun 11
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Friday, 23 March 2012
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Fund Manager Comment
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Performance and Strategy
We recorded our first quarter of slight underperformance since the crisis ended. What we gained on our duration and credit investments we lost on currency exposures. The biggest detractors from performance on the currency front were our large underweight positions in the yen and the euro. These were offset partially by our holdings in other currencies but not by enough. Our fixed income investments netted a solid performance with half the gains coming from our holdings of U.S. corporate credit.
Currency Strategy
Despite the strength in the euro and yen during the second quarter, our investment strategy continues to emphasize under weights in these major currencies with the biggest portion of portfolios allocated back to dollars and the British pound. Looking at the mess in Europe, it begs asking why the euro is still above U.S. $1.40 instead of trading somewhere below U.S.$1.30 or lower? Similarly, why is the yen not weaker with Japan's economy near a standstill, politics in disarray, the government intervening to stop the yen from rallying and the Bank of Japan intervening to buy equity ETFs in order to support the market? The 10-year CDS rate on Japanese government bonds (JGB) currently exceeds the yield on 10-year JGBs. The answer is that as bad as things are abroad, the dollar has been undermined by the dramatic contrast in the stance of the Federal Reserve with central banks in Europe and Japan. The ECB has been raising rates this year and shrinking its balance sheet; the Fed has been expanding its balance sheet. In addition, the failure of politicians to come to terms with public finances in the U.S. continues to undermine confidence in the status of the U.S. dollar as reserve currency with plenty of reports of countries attempting to diversify out of dollars. The dollar is clearly unloved. Under different circumstances, we would be even more invested in the U.S. dollar based on its pricing profile and macro factors. But the extreme stance of the Fed and budget gridlock have held dollar investors back. This is expected to change in the second half of the year. Confidence in the dollar could by buoyed dramatically if U.S. politicians are able to do what's right as Churchill predicted. As for a blueprint of what might be right, the President's own non-partisan commission on Fiscal Responsibility and Reform released a set of proposals at the end of 2010, which we found both sensible and credible. Therefore, policy divergences, which supported the euro in the first half should reverse in the second. The ECB should stop raising rates in the second half and may be forced to accept a lot of low-quality sovereign debt as collateral on emergency lending and not sterilize these purchases as it has done all year. In contrast, the Fed has ended its balance sheet expansion for the time being and set the bar very high for any new stimulus. We like the British pound. In many ways, it mirrors the same outlook as for the dollar. Its price has already weakened significantly relative to various benchmarks of value in line with the Bank of England's dovish line on supporting the economy in the face of extreme fiscal austerity. Easy money and tight fiscal policy are very negative for a currency. However, much of this appears already priced into sterling with Europe about to move in this direction. Our currency strategy has included a gradual reduction in exposure to many of the commodity currencies. Most of these currencies are extremely expensive by any yardstick other than commodity prices. Moreover, standard country analysis shows that in all cases the drag from the strong currencies is bigger than the terms-of-trade benefits pushing them higher. For example, real net exports are in deficit and monetary condition-type calculations show recession-like levels for New Zealand and Australia. Bull markets in these currencies are completely dependent on a sustained rally in commodities. However, our broader macro view about consolidation this year argues for a pause in this trend if not a more meaningful correction. We continue to pursue peripheral currencies where we see value and macro forces in support of strength. Currently, we own a basket of regional Asian currencies, which offer good long-term value prospects at a time when central banks in many of these countries are pre-occupied with fighting inflation.
Interest Rate Strategy
We continue to gradually reduce our investments in U.S. corporate credit. This is in line with the narrowing in spreads that has taken place over the past two years as well as our expectation that the macro forces are shifting from reflation to consolidation. It is possible that spreads could overshoot in the other direction and tighten even further in coming months. However, we look on credit opportunistically and will continue to shed exposure now that the value largely is out of the market and macro forces are shifting. We have a bar-belled strategy for U.S. government bonds, owning cash and very long-term Treasury bonds. The Treasury bond market performed well this past quarter as yields fell across the entire curve. As noted earlier, the strength at the long end of the curve in Treasuries and Bunds underscores the low growth outlook for the near term and the lack of any meaningful short-term inflation risk. Duration risk may grow with time but we are not overly concerned at the moment. Fears that there is no entity big enough to substitute for QE2 purchases from the Fed are over-exaggerated. U.S. commercial banks are sitting on hundreds of billions of cash assets which most likely will end up in this market, especially if U.S. politicians put together a credible budget-cutting plan. In the meantime, we will continue to adjust our thinking and duration as events play out this year. European bonds offer tantalizing spread opportunities and it is very clear that the authorities, although clumsy, will do everything to avoid a Lehman repeat. The U.S. gained control of its crisis in 2008/2009 with the Fed lending money to all financial institutions in exchange for questionable collateral. It did not sterilize these loans and expanded its balance sheet. In addition, the central bank then systematically bought new MBS issued by the agencies. The ECB views the debt crisis in Europe as a fiscal problem but if politicians continue to fumble the ball the central bank will have little choice but to step in to stabilize markets. It has already announced it will suspend its collateral rules. We are waiting for signs of a policy capitulation. We added incrementally to duration abroad. We don't like the Australian dollar; but, for the same reasons we do like the domestic bond market. It contributed significantly to performance in the second quarter. Similarly, we have maintained holdings of Brazilian bonds while hedging the currency in those accounts that can invest in this market. Mexican bonds offer an attractive risk-adjusted yield, as do South African bonds. In the current environment of consolidation and diverging regional growth patterns we will continue to take a rifle-shot approach to security and country selection. In summary, portfolio positioning for our broadest mandates continues to reflect a modest overweight in the U.S. dollar and significant underweights in the euro and the yen. Our underweight in Europe is mitigated partially through holdings in surrounding currencies including sterling. In addition, our underweight in the yen has been offset by positions in smaller emerging Asian economy currencies. We have below-benchmark exposure in the commodity currencies including the Brazilian Real while maintaining investments in their respective bond markets. Duration is slightly above benchmark with a significant portion of it derived from holdings in U.S. corporate credits and long-term U.S. treasury bonds. Once again we would like to thank our clients for their patronage. We appreciate the continued confidence you show in selecting us to manage your funds.
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Stanlib Global Bond comment - Sep 11
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Friday, 23 March 2012
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Fund Manager Comment
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Performance and Strategy
Global government bonds outperformed corporate bonds over the quarter. Risky assets, such as high-yield and emerging market debt, recorded negative returns as investors took profits in these asset classes. Inflation-linked bonds also underperformed nominal government bonds amid a flight to quality. However, we expect inflation to remain at elevated levels and above central bank targets in the near future US Treasuries were buoyed after the Federal Reserve announced that it would lengthen the maturities of its bond holdings in a bid to reduce long-term borrowing costs. Financial market conditions improved somewhat after European Union leaders announced a new three-year aid package for Greece and empowered the €440 billion rescue fund to buy debt across stressed Euro zone economies. However, market volatility returned, with contagion spreading to Spain and Italy and pushing market interest rates higher. Against this backdrop, the European Central Bank purchased Italian and Spanish debt to soften market rates. In the global corporate bond market, credit spreads widened regardless of fundamentals, over the quarter led by financials, as fears of a Greek default and contagion thereof loomed high.
The fund underperformed its benchmark over the quarter. As investors became risk averse, the fund's overweight position in BBB and high yield bonds proved detrimental to performance.
Financials underperformed
Name selection coupled with the overweight stance in banks, primarily Subordinated Lower Tier II and Tier I debt, hurt returns. Financials held back returns as spreads widened considerably. In addition, the downgrades of Bank of America, Citigroup and Wells Fargo further added to the stress in the market. The overweight stance in Commerzbank, Intesa Sanpaolo, Barclays and insurer Swiss Re detracted from performance.
Overweight industrials and communications hurt returns
The fund's exposure to lead-recycler Eco-Bat within industrials, and the overweight position in media and entertainment company NBC Universal Media held back performance. The overweight exposure to asset-backed securities also hampered performance. However, positive issue selection within the sector mitigated losses.
Term structure added value
The overweight position in the long-end of the US yield curve proved beneficial as yields on longer-dated bonds fell more than those on the short-term ones. In addition, the holdings in the 10-year part of the European curve outperformed.
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Merger
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Thursday, 6 October 2011
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Official Announcement
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The US Dollar Bond, European Bond and Sterling Bond funds all merged into the Global Bond Fund effective 29/09/2011
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Stanlib Global Bond comment - Mar 11
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Tuesday, 14 June 2011
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Fund Manager Comment
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Fund Review
The greatest period of refl ation in modern economic history is coming to a close. Since late 2008, the right tactic has been to bet that these refl ationary tactics would not only work to prevent a depression but would re-ignite global growth. Risk assets ranging from equities to emerging markets, corporate and high yielding debt along with commodities have rallied strongly. The world economy has rebounded and, in our opinion, is on the path to an unbalanced but self-sustaining expansion. The key risk to our view is the price of energy. The prospect of another major energy shock is a signifi cant and disheartening risk. Prices cannot keep rising indefi nitely as noted earlier. Many analysts including the IMF have concluded that the world can withstand even higher energy prices. This is not our view. We are concerned that debt levels and unemployment rates remain very high in the developed world. Rates may not have to go up at all for consumer spending fi repower to be exhausted by a surge in energy prices. In the current environment of building uncertainty, we continue to focus on our broad strategy of looking for the combination of pricing and macro information which suggests good value opportunities in our investable universe of currencies and fi xed-income markets.
Looking Ahead
The majority of the duration in the portfolio comes from holding of our U.S. corporate bonds and non-agency Mortgage Backed Securities. This may seem controversial in view of the near universal bearishness that currently seems to exist regarding the outlook for U.S. debt. However, the spreads between the short and long end of the yield curve had reached historic extremes. Moreover, the prospect of the Fed beginning to exit some of its exceptional stimulus programs seemed more constructive for bonds than negative. We remain underweight the Yen and Euro in favour of the British Pound Sterling. We do like the British Pound sterling. The U.K. government has taken aggressive measures to get its fi scal house in order with a plan that imposes a fi scal drag equal to about 9% of GDP on the British economy over the next 5 years. Everyone knew this was coming. All political parties had been discussing the inevitability of this adjustment prior to the last election. The measures chosen to reduce the defi cit were based primarily on spending reductions and less so on tax increases but the latter have been raised and the impact on the economy is evident in very soggy demand indicators early in the new year. The British pound, however, has already fallen in anticipation of any short-term drag from these measures and it is one of the few currencies in the world trading at a discount to its PPP against the U.S. dollar. We expect the economy will do better than the generally very negative expectations attendant the fi scal restraint. Our dislike for the yen and euro would normally lead us to the U.S. dollar, and in many accounts we are overweight. We think that the front end of the U.S. yield curve and the U.S. dollar are two of the biggest pricing anomalies in the global economy at the moment, one obviously related to the other. Depending on the index you use, the dollar is trading near or at all-time lows. This kind of price profi le suggests the kind of mean-reversion potential we normally look for. On top of the pricing profi le in the dollar, exports have surged back to their previous highs, capital spending is on the rise, employment is fi nally gaining traction and Fed Chairman Bernanke stated to Congress in February that the tail risk of defl ation was negligible, removing the main reason for QE2 in the fi rst place. It seems that the negative outlook refl ected in the slide of the dollar may be overdone.
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Stanlib Global Bond comment - Dec 10
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Friday, 25 February 2011
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Fund Manager Comment
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Net of fees, the portfolio outperformed the Barclays Global Aggregate by 0.4% during the fourth quarter. Global bonds sold-off noticeably in the quarter despite the announcement of a $600bn quantitative easing program by the Federal Reserve. Globally yield curves have steepened reflecting an upward bias in inflation. This move has been supported by improved economic data, including an improvement in consumer credit spending and US retail sales. In addition, concerns around rising commodity prices and the impact on inflation also pushed yields higher. Also pressuring higher yields was renewed contagion in peripheral EMU bond markets - particularly in Italy, Ireland and Spain. Thanks to this contagion, the European bond market was the worst performing region. In the United States, stronger growth and rising risk appetite limited bond flows as investors sought out higher yielding assets. Although Japanese bonds declined, they performed relatively well thanks to still slow growth and outright deflation, which attracted investors to the market despite their very low nominal yields. The US dollar weakened during the quarter as commodity prices continued their ascent and the FED maintained an extremely accommodative monetary stance. The best performing currencies were those of commodity producers including the New Zealand dollar (up 6.3%), Australian dollar (up 5.8%), South African rand (up 5.0%) and Canadian dollar (up 3.1%). The Swiss franc (up 5.1%) also performed well and it appears that money is fl owing out of various parts of EMU (priced in euros) and into Swiss banks (after being converted to franc), thus pressuring the franc higher, particularly against the euro. Problems plaguing the eurozone weighed on other European currencies along with the euro (down 1.8%). The Norwegian krone (up 0.9%) and Swedish krona (up 0.4%) underperformed while the British pound (down 0.7%) and Danish krone (down 1.8%) actually depreciated. Analysts' models suggest that 10-year yields are close to 4% implying markets are considerably overvalued! Treasuries still offer a hedge to the down-side and have a place in a balanced portfolio, however corporate credit offers better return potential. In December yields of A-rated investment grade corporate bonds in the US narrowed 14 basis points ending the year 156 basis points ahead of 10-year US treasuries. Corporate credit is therefore favored over treasuries and this is supported by strong fundamentals within corporate America and the anticipation of further narrowing of spreads.
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Stanlib Global Bond comment - Sep 10
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Wednesday, 5 January 2011
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Fund Manager Comment
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Investment Performance and Strategy
Your portfolios delivered strong absolute and relative returns again during the third quarter. The main driver for this return was duration due to our positioning in longer dated bonds in some of the better performing European countries in the International portfolios and in U.S. corporate credit in the Global portfolios. The anxiety about economic growth led to sharp declines in government bonds. Spreads remained tight and yields on corporate bonds followed suit. In light of the developments which drove the dollar lower, we increased our non-dollar exposure through purchases of more of the peripheral high beta European currencies such as the Hungarian forint, where your guidelines allowed, and took hedges off our Australian dollar position. Nonetheless, the incremental contribution of currency gains was slightly negative due mainly to the relentless upward tendency of the Japanese yen, which we continue to avoid.
Looking into the future, we think that price risk continues to build up in U.S. and European low-yielding government debt. Nominal bond yields are significantly below levels of nominal GDP growth which we regard as sustainable. Treasury yields are only slightly higher than they were in 2008 at the peak of the crisis. But in 2008 investors were worried about deflation. Current measures of inflation show that investors increasingly worry that central bank efforts to anchor the long end of the curve are creating inflation risks.
At the moment, reduced expectations of the economy in combination with perceptions of massive purchases of government securities by the Fed, Bank of England and the Bank of Japan act to keep yields down. If the economic scenario we envision comes to pass, central banks will not have a reason to intervene in public bond markets as aggressively as currently expected. We exited the third quarter with your portfolios reflecting less duration than when the quarter started. We expect to continue reducing duration gradually during the current quarter.
Our Global portfolios continue to hold non-agency CMOs. Year to date as of September 30, the total return on these securities has been about 19% and about 17% respectively for our representative accounts. The aftershock of the expiring tax credit is likely to linger for the remainder of the year. Nonetheless, loss-adjusted yields in this sector still offer 200-400 basis point yield pick up from other credit sectors and should generate outperformance over the medium term, notwithstanding the potential for price volatility over the balance of the year.
The currency outlook will be particularly sensitive to the economic scenario. At the end of the quarter, expectations of an aggressive second round of quantitative easing by the Fed sent the dollar sliding. The euro has become expensive once more and the dollar is looking well valued based on its real-effective value. In addition, our economic scenario implies that the Fed will not have cause to continue purchasing Treasury securities, or at least not as aggressively as expected at the moment. The implication is a potential swing back to the dollar later this quarter or beyond. Catalysts for this shift would be signs that employment is gaining enough traction to alter the Fed's view about the balance of economic risks and the need for more quantitative easing. Additionally, the outcome of the November U.S. Congressional elections could have a significant impact on U.S. fiscal policy with important implications for the dollar.
We do not anticipate any change in our strategy on the yen. Recent intervention on the part of the Japanese authorities to weaken the currency is consistent with the broader view we have taken about this economy. The yen has rallied 47% against the euro since 2008 and 80% against the Korean won and 34% against the yuan since 2007. Exports are the main incremental growth driver for the economy. Pressure for a reduction in the level of the currency will continue to build. In addition, we continue to see no value and only risk in owning Japanese bonds where yields are close to 1% and provide no capital appreciation potential or coupon protection against a rapidly deteriorating fiscal position.
Finally, we continue to pursue a strategy of investing in currencies and countries outside of the developed world (subject to investment guidelines). Capital is ultimately attracted to areas where there is a return on investment. It is very clear that the emerging area of the world offers growth while many areas of the developed world continue to struggle with fiscal consolidation and the aftermath of the financial crisis.
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Stanlib Global Bond comment - Jun 10
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Thursday, 9 September 2010
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Fund Manager Comment
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A little over a year ago investor sentiment was dominated by absolute fear. Fear that the financial system would melt and that the world might already be in depression. Fear that the way of life we had become accustomed to in the post-war period was about to change. Confidence collapsed. Policy makers worldwide reacted. They launched an unprecedented combination of stimulus measures and in doing so opened up a new chapter in financial experimentation which has created great uncertainty, risk and opportunity. Our view is that confidence should hold and the global economy will keep expanding although it may take a few months for investor sentiment to follow suit. It is not a normal recovery. The U.S. private sector is deleveraging. Growth could be tepid next year and mixed in different parts of the world. But sustained confidence in an environment of near zero interest rates should subsidize corporate profits and encourage investors out of risk-free low yielding securities into higher-yielding markets and the real economy. The main risk to our view hinges on the policy outlook and its impact on investor and business confidence. The main performance generator was the heavy underweight in the euro, the latter falling almost 10% during the quarter. The large overweighting in long dated U.S. assets helped the portfolio and produced in aggregate a low double digit return. Also, your portfolios did not own any European credit or securities in the four troubled government bond markets in the region. Detracting from performance was the yen which your portfolios were also heavily underweight. The currency rallied roughly 6%. Some of the peripheral European currencies you own also detracted from performance. Lastly, the sinking of the South Korean naval vessel and resulting geopolitical uncertainty hurt performance as a result of your holdings of the South Korean won. We view the latter as a temporary development. Going into the fi rst half of 2010, the world was overwhelmingly bearish the dollar. In our meetings with clients, we met a lot of skepticism and concern about our overweight in the dollar. As 2010 progressed, investor sentiment to the dollar became more constructive because of improving economic signs and a steady reduction in the Fed's quantitative easing operations not to mention the crisis in Europe and the ECB's aggressive balance sheet expansion. The euro fell to below 1.20 during the second quarter which is roughly in line with our estimates of long-term equilibrium. Going into the second half of the year, sentiment appears to have completely reversed from the beginning of the year. Investors are negative on Europe and skeptical about efforts to stabilize the financial system. A surprise could be that this skepticism moderates amid signs of various European governments taking action not only to deal with their deficits in the short-term but over the medium term as well. In other words, the headline grabbing worst case scenario never comes to pass. We continue to look for diversification out of credit and currency markets of the high-debt developed world into the low indebted and more rapidly growing emerging world where our mandates permit.
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Fund Name Changed
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Thursday, 22 July 2010
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Official Announcement
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The STANLIB Offshore International Bond Fund will change it's name to STANLIB Global Bond Fund, effective from 22 July 2010
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Stanlib International Bond comment - Mar 10
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Tuesday, 29 June 2010
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Fund Manager Comment
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Currencies Strategy
Our currency strategy remains broadly unchanged although there have been some noteworthy shifts in the portfolio to position for what we think lies ahead. Within the G3 currencies we remain concentrated in the dollar with minimal holdings of yen or euro. We remain constructive on the dollar because the U.S. economy continues to show strength relative to both the euro area and Japan. The Fed has indicated that rates will remain on hold for a while to come but we believe that there is significant risk at the front of the curve. Conditions could change significantly in the next few months if employment expands as much as we think. The Federal Funds rate, currently close to zero, could close the year somewhere closer to 1-2%.
In contrast, the Greek debt crisis has propelled Europe towards very tight fiscal policy and sustained easy monetary policy. This combination is usually negative for a currency. Last quarter we highlighted how expensive the euro was relative to traditional benchmarks of value such as real-traded weighted exchange rates and purchasing power parity. The first quarter's plunge in the currency has reduced this overvaluation significantly but it remains above levels we think are consistent with a more neutral price picture. The currency is oversold at the moment and may stabilize or even rebound in coming weeks due to some sort of resolution of the Greek crisis. Nonetheless, the fundamentals remain negative.
Similarly, we continue to shun the yen. Our views on this currency are well known to our clients. We have described in detail the full extent of the problem facing public finances. A declining household savings rate means that funding the government's financing will come from corporate savings. A strengthening nominal yen does not help this process. Japan has become more competitive through a brutal process of domestic deflation. However, the new government has continued to press the Bank of Japan to fight deflation. With interest rates already low and fiscal policy stretched, the only real avenue is a weaker nominal exchange rate. The central bank has indicated that it will expand its' quantitative easing operations while other major central banks start to move in the opposite direction.
Outside of these three major currencies your portfolios have exposure to other European currencies by way of the Swedish and Norwegian currencies, the Polish zloty and most importantly the British pound. Our review process indicates that these currencies offer much better intrinsic value over the euro. One of our longer-term investment themes has been to underweight the G3 currencies and to overweight currencies in the rest of the world and in particular several emerging market currencies. Marginal growth in the global economy will come from the emerging middle kingdom of the world and we expect capital to migrate to these areas and bid up their respective currencies.
Interest Rates
Duration in our representative global opportunistic accounts is slightly above the index level but with the portfolio structure barbelled. We think there is some risk of interest rates rising along the yield curve but most of the risk is concentrated at the short end of the global yield curve. Most of the duration in the portfolio is concentrated in our holdings of U.S. corporate and mortgage backed securities. As of the end of the quarter, investment grade corporate bonds made up 22.7% of the Global Opportunistic Fixed Income portfolio. Our holdings of non agency collateralized mortgage obligations ("CMO") made up 12.6% of the Global Opportunistic portfolios.
Last year's returns from your holdings of corporate bonds were driven by a combination of the severe dislocation in spreads that existed at the beginning of the year and the aggressive policies of reflation that took place in the U.S. and around the world. Since purchase, your corporate holdings have added more than 3% in alpha relative to owning similar duration in U.S. Treasuries. The compression in corporate spreads is very advanced and we have begun a gradual process of reducing exposure which we expect to continue. Nonetheless, based on historical averages for spread normalization during economic recoveries, 2010 could provide another 10% of retracement from the extremes.
We continue to believe that valuations are still attractive in the non-agency CMO market. We are seeing the first signs of a slowdown in the delinquency pipeline and lower loss severity and expect further upside this year although, as with corporate, not as much upside as we have received in 2009. The main threat to these securities is the housing recovery and, in particular, the foreclosure pipeline. About 5.5 million mortgages are seriously delinquent or in some stage of foreclosure. The speed at which this supply comes on to the market is the key to gauging risk to the housing recovery. We think that the government will do whatever it takes to prevent this supply from overwhelming the market.
The recent HAMP (Home Affordable Modification Program) Debt Forgiveness and FHA refinance programs are all consistent with this expectation. The path of mortgage rates will also have a bearing on the housing outlook. The Fed is no longer absorbing supply and there are issues concerning the general trend in rates as we noted earlier. Nonetheless, any upward pressure on the general level of rates will coincide with employment and income growth which should overcome at least initially modest increases in borrowing costs.
Your portfolios also have significant holdings in long-term U.S. and U.K. sovereign bonds. These securities were originally held throughout 2009 as a hedge against the possibility that our economic scenario might not play out and instead that the world would get what everyone worried about which was a deflationary depression. Yields have backed up throughout the last 5 quarters due mainly to the influence of a renormalizing economic cycle. As we noted earlier there is still some price risk in these securities going forward. However, we think most of the risk in the yield curve is at the short end.
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Stanlib International Bond comment - Dec 09
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Friday, 19 March 2010
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Fund Manager Comment
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Improved credit fundamentals led to credit spreads tightening over the quarter and I gradually increased the fund's credit beta. The portfolio carries an attractive yield and my priority has been to look for relative value within sectors such as financials. Furthermore, yield curves are very steep and I have started to implement a flattening strategy primarily on the US curve.
Increased exposure to banks and retained overweight in ASS
I have added to the overweight stance in subordinated debt through Lower Tier II bonds and senior debt, while reducing the exposure to Tier I paper. I added to the holdings in Lloyds and Bank of America. I also maintained the overweight in ABS holdings amid improving liquidity and price appreciation in the sector.
Retained overall long duration position
The fund is still overweight duration relative to benchmark, essentially in Europe and Japan. However, I am underweight in the US and UK amid optimistic growth potential in these economies relative to Europe and Japan.
Took profits in US inflation-linked bonds, added Japanese linkers
Over the quarter, I sold off the exposure to US inflation-linked bonds as they rallied strongly and bought back some Japanese linkers. I see further upside potential in Japanese inflation breakevens as the government continues to buy back its inflationlinked debt.
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Stanlib International Bond comment - Sep 09
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Monday, 30 November 2009
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Fund Manager Comment
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Over the quarter, the fund outperformed its benchmark. The underlying risk appetite continued to improve across regions amid positive economic data releases and credit spreads narrowed, boosting corporate bonds. Consequently, the fund's overweight exposure to corporate bonds, in particular BBB-rated securities buoyed relative returns. Furthermore, an overweight position in banks and insurers, in particular, subordinated debt (Lower Tier II & Tier I) continued to outperform. Holdings such as Bank of America, Lloyds TSB, Credit Logement and European insurance company Eureko, proved beneficial. Issue selection within the consumers and industrials sectors further aided relative returns. The fund's overweight positions in Imperial Tobacco, pharmaceuticals company Pfizer and commodities trader Glencore boosted returns.
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Stanlib International Bond comment - Jun 09
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Friday, 18 September 2009
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Fund Manager Comment
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Over the quarter, the fund outperformed its benchmark.
Credit markets improved over the period as conditions stabilised and spreads tightened across all sectors. Consequently, the fund's overweight exposure to corporate bonds proved beneficial. Furthermore, an overweight position in banks, in particular, subordinated debt (Lower Tier II and Tier I) supported relative returns. Credit spreads within banks tightened, boosting holdings including Bank of America, Rabobank and Barclays.
An improvement in risk appetite led to the strong performance of emerging market and high yield debt and the fund's holdings in the Russian bank VTB aided returns. Security selection within the telecommunications and utilities sectors also buoyed returns.
Additionally, the fund's holdings in the US and Japanese inflation-linked bonds helped performance as they outperformed conventional government bonds. Conversely, an overweight position in asset-backed securities tempered returns; the sector underperformed the credit market recovery.
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Stanlib International Bond comment - Dec 08
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Wednesday, 25 March 2009
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Fund Manager Comment
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Over the quarter, the fund underperformed its benchmark.
The weakness in credit markets intensified over the quarter, caused by a wave of investor de-leveraging and growing uncertainty about the prospects for the global economy. Subsequently, credit spreads widened and the fund's holdings in the sector detracted from performance. The reduction in investors' risk appetite also hurt emerging-market and high yield bonds.
Despite being underweight banks, an exposure to selected Tier I and Tier II issues held back relative performance as the sector reeled under increased operational risks and uncertainty about their earnings potential. However, I continue to hold these names as the sector is expected to improve with an increase in new issuance over the coming months. Holdings in inflation-linked bonds in the US, Europe and Japan also hurt returns as mounting global deflationary pressures reduced the demand for these bonds. Conversely, a yield curve steepening strategy in the UK proved beneficial given that yields on short-term bonds fell more than those on longer-dated paper.
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Stanlib International Bond comment - Sep 08
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Friday, 14 November 2008
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Fund Manager Comment
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Over the quarter, the fund underperformed its benchmark.
As the crisis gained momentum, credit spreads widened significantly and investor sentiment worsened. Subsequently,the fund's exposure to credit, including asset-backed securities, hurt relative returns. Additionally, the pronounced reduction in investors' risk appetite resulted in a retrenchment in short-term capital flows to emerging-market and high yield bonds. As a result, holdings within these sectors also detracted from performance.
Despite being underweight banks, an exposure to selected holdings such as Natixis held back relative performance, as the sector came under severe stress fuelled by increasing rumours surrounding a large number of banks and their access to liquidity. In contrast, an underweight exposure to brokers, namely Lehman Brothers, boosted relative returns. Moreover, a yield curve steepening strategy in Europe proved beneficial given that yields on short-term bonds fell more than those on longer-dated paper.
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Stanlib International Bond comment - Jun 08
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Thursday, 18 September 2008
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Fund Manager Comment
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The fund outperformed its benchmark over the quarter.
As a result of the actions taken by central banks globally, financial markets stabilised over the period. Investor sentiment improved and, subsequently, the fund's exposure to credit proved rewarding. Moreover, a tightening of spreads boosted holdings within the emerging-market and high-yield sectors. In particular, Hungarian telecommunications company Invitel and Russia-based TransCapital Bank contributed.
Selected holdings such as Bank of Scotland in the banking sector also aided returns, as did positions in the industrials sector, which remained resilient amid the global economic slowdown.
Furthermore, holdings in inflation-linked bonds were supportive amid rising inflationary indicators, propelled by increasing oil and food prices globally. Conversely, the asset-backed securities held in the portfolio detracted, with continued mark-downs in the sector even as the credit markets recovered.
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Stanlib International Bond comment - Mar 08
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Friday, 11 July 2008
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Fund Manager Comment
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An exposure to asset-backed securities (ABS) held back performance; this market remained in trouble amid successive re-pricing of SIVs. However, I remain comfortable with the quality of the holdings, and there has been no material deterioration in their fundamentals.
Credit spreads widened sharply, as concerns about monoline bond insurers and forced selling by leveraged investors increased demand for high-quality assets. Subsequently, high-yield bonds fared poorly, hurting the fund's returns. Selected holdings in the banking sector, particularly Mizuho Finance and BayernLB Capital, also detracted, following continued write-downs by financial institutions. Nevertheless, the widening of spreads in this sector has created interesting investment opportunities.
On a positive note, the fund benefited from a US flattener added in March, as yields on short-dated bonds fell less than those on longer-dated maturities over the month.
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Stanlib International Bond comment - Dec 07
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Thursday, 6 March 2008
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Fund Manager Comment
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The fund's exposure to asset-backed securities (ABS) held back returns after downgrades from rating agencies and increased concerns about the scale of possible losses from the financial market turmoil led to a widening of spreads. However, the vast majority of ABS paper held in the portfolio is of good quality, and there has been no deterioration in their underlying asset quality.
The widening of spreads further held back returns through an overweight in selected emerging market and highyield bonds, as investors favoured high-quality assets.
On a positive note, the fund benefited from its holdings in inflation-linked bonds on the back of rising energy and food prices in the US, Europe and Japan, which increased inflationary expectations.
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Stanlib International Bond comment - Sep 07
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Tuesday, 27 November 2007
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Fund Manager Comment
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Over the quarter, the fund underperformed its benchmark.
The fund's exposure to corporate bonds detracted from performance. Credit spreads widened due to a tightening of liquidity caused by US sub-prime problems. However, at these wider spread levels the manager views this asset class as attractive and continues to hold selective corporate issues. The asset-backed securities (ABS) sector held back returns, as issuers were forced to value a number of issues at market prices, which declined along with investor's risk appetite. However, this was a technical rather than a fundamental problem and the underlying assets of the ABS that the fund currently holds, are of good quality.
The widening of credit spreads further impacted performance through an overweight in Emerging Market debt. On a positive note, the fund benefited from a steepening of the US yield curve. Yields on short-dated bonds fell more than those on long-dated bonds over the period.
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Stanlib International Bond comment - Jun 07
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Tuesday, 25 September 2007
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Fund Manager Comment
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During the quarter, the fund underperformed its benchmark on a net-of-fees basis.
The key detractor from performance was the fund's position in Japanese floating rate notes. These bonds underperformed, as the Japanese government bond curve flattened.
On a positive note, the fund's short-duration position in Europe contributed to relative performance, as bond yields rose over the quarter amid expectations of further interest rate rises. Additionally, a short-duration position in the US also boosted returns; yields rose over the quarter in light of stronger-than-expected economic data.
Inflation-linked bonds outperformed against a background of rising oil prices and inflationary concerns.
Despite credit spreads widening towards the end of the quarter, the fund's overweight position in emerging debt and high-yield bonds contributed to relative performance.
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Stanlib International Bond comment - Mar 07
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Thursday, 24 May 2007
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Fund Manager Comment
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During the quarter, the fund outperformed its benchmark, the Lehman Brothers Global Aggregate G5 ex-MBS Index. The fund's short-duration position in Europe was the key contributor to performance amid increased expectations of rising interest rates over the quarter. Holdings in US Treasury Inflation-Protected Securities (TIPS) also boosted returns as break-even inflation rates rose during the review period in light of higher inflationary concerns. The fund's exposure to high-quality asset-backed securities also added to relative performance. Exposure to Emerging Market bonds, particularly in Brazil, enhanced returns. However, exposure to Eastern European issues, notably banks in Kazakhstan, marginally restrained returns, as spreads widened due to an abundance of supply.
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Stanlib International Bond comment - Dec 06
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Monday, 26 March 2007
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Fund Manager Comment
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Over the quarter, the fund returned 1.6%, underperforming the benchmark, which returned 1.9% over the same period. The main detractor from performance was the fund's position in Japanese index-linked bonds, which underperformed as growth in the region has been below expectations. However, the fund manager has retained the position as part of his overall Japanese exposure. Stock selection within emerging markets also hampered returns, as the fund's Eastern European issuers underperformed relative to other emerging market debt. On a positive note, the fund's exposure to lower quality bonds did well, as these securities gained over the period.
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Stanlib International Bond comment - Sep 06
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Monday, 26 March 2007
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Fund Manager Comment
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During the quarter, the fund returned 1.7% in US dollar terms, underperforming the benchmark index, which returned 1.9% over the same period.The main detractors from performance were a short duration relative to the benchmark and a related cross-market trade. The fund was underweight US dollar securities in favour of sterling and Japanese yen positions. This hurt performance; US dollar bond markets rallied as commodities prices fell, limiting inflation fears, and the Federal Reserve paused after raising rates at seventeen previous meetings. Bulleted positions (where a large proportion of bonds are held at a particular maturity) taken to benefit from a change in the shape of the yield curve did well in Japan, Europe and the UK. The fund's lower quality names and emerging-market bonds did well, after volatility eased from earlier in the summer. The fund's holding in hybrid debt (subordinated debt with equity like characteristics) also added to performance, following their inclusion by Lehman Brothers indices as well as a favourable ruling by the National Association of Insurance Commissioners
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Stanlib International Bond comment - Jun 06
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Tuesday, 28 November 2006
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Fund Manager Comment
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Over the quarter, the fund returned 2.5% in US dollar terms, underperforming the benchmark index, which returned 2.9% over the same period. As in the previous quarter, the major market yield curves were well correlated, limiting the effectiveness of cross-market trades. However, a short position in debt denominated in US dollars, with a corresponding overweight to sterling and yen, performed well.Defensive asset-backed names also did well amid heightened (local) market volatility. Stock picking was a significant driver of returns as a general move away from risky assets, and consequently a decrease in liquidity, caused the broad credit market to perform poorly. Holdings in Indian convertible bonds did particularly well, as did a defensive position in short-dated debt issued by General Motors. Detractors from performance came from the fund's holding in hybrid debt. They are under investigation by the US Securities and exchange commission as to their classification; a favourable ruling would cause significant outperformance. However, while ambiguity remains, their effect on the fund's performance has proved negative.
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Stanlib International Bond comment - Mar 06
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Friday, 25 August 2006
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Fund Manager Comment
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During the quarter, the fund returned -0.2% in US dollar terms, outperforming the benchmark index, which returned - 0.3% over the same period. Fund performance was driven by small, uncorrelated strategies. These included exposure to high-yield bonds and bonds from emerging markets. Brazilian government bonds performed particularly well in January and February as the government announced buybacks of its 'Brady' debt. Major markets were closely correlated over the quarter, reducing the effectiveness of cross-market trades intended to exploit inefficiencies between the markets. However, performance was boosted by the fund's slightly overweight exposure to Japan, which performed strongly on a relative basis, and its underweight exposure to the US. Exposure to European bonds with an average life of seven years proved positive as yields of longer-dated bonds rose further than those of short-dated bonds.
Stock selection amongst corporate bonds proved beneficial; in particular, bonds from issuers such as Lazard and Bank of Moscow performed well. During the first quarter, the fund manager removed his curve-flattening strategy in the US. The fund has similar positions in Europe and Japan, as the fund manager anticipates that the yield curve will steepen in both countries. The fund retained overweight positions in selected bonds in emerging markets and asset-backed securities in order to help maintain a diverse portfolio, given current risks in the market from leveraged buyouts and M&A. The fund retained its underweight exposure to government bonds in favour of asset-backed securities, which offer additional yield, are less susceptible to event risk, and are not perfectly correlated with other corporate bonds.
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Standard Bank International Bond comment - Sep 05
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Tuesday, 20 December 2005
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Fund Manager Comment
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During the quarter, the portfolio's underweight exposure to the US bond market was the primary driver of performance of the quarter. In September, US treasuries underperformed government bonds in Europe and Japan, as investors reassessed the impact of the hurricanes in the Gulf of Mexico, and their impact on monetary policy. The fund also benefited from its allocation to Japanese government bonds. While some expect the Bank of Japan to change its zero interest rate policy, this is generally believed to be unlikely in the near term. The portfolio's overweight exposure to corporate bonds proved beneficial. Corporate bonds outperformed government debt in most major markets, due to ongoing demand and stable credit quality.
Performance was further boosted by the portfolio's exposure to Russian debt, and high-conviction positions such as the fund's holding in Italian bank Banco Populare di Lodi.
At the end of the third quarter, the manager had increased the fund's exposure to index-linked bonds, on the basis that they offer cheap protection from rising inflation, given the current market environment, and there is no risk of default.
The manager increased the extent of the fund's underweight exposure to the US, in favor of Europe and Japan. This decision was made on the basis that the Federal Reserve is likely to keep raising interest rates, while a rate rise from the Bank of Japan or European Central Bank is considered unlikely.
The manager sees good visibility in the credit market over the next six months and, with credit default levels near historic lows, is maintaining the fund's exposure to the corporate market.
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Standard Bank International Bond comment - Jun 05
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Thursday, 17 November 2005
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Fund Manager Comment
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The manager added to the fund's corporate exposure as spreads widened during the first half of the quarter, as US carmakers GM and Ford were downgraded to high-yield status. Spreads then tightened during the second half of the quarter, as structural demand from institutional investors returned to support the market, and this was positive for fund performance. Both government bonds and investment-grade issues outperformed the high-yield asset class, and the fund benefited from its overweight exposure to government issues.
Additionally, the portfolio's exposure to asset-backed securities proved rewarding, as did the fund's positioning across the sterling yield curve, where a strategy known as a 'steepening trade' worked well. However, on the negative side, the fund held an overweight position within Japanese and eurodenominated debt at the expense of US dollar securities and this hurt performance as US treasuries unexpectedly rallied towards the end of the quarter.
At the end of the second quarter, the portfolio retained its overweight exposure to government securities at the expense of higher-quality AAA and AA-rated corporate bonds, although this exposure was somewhat reduced. This reflects the manager's belief that these issues look expensive relative to historic levels and that further upside is limited.
At the other end of the credit quality spectrum, exposure to sub-investment grade bonds was reduced during the quarter, as valuations in this asset class continue to look expensive.
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Standard Bank International Bond comment - Mar 05
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Friday, 1 July 2005
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Fund Manager Comment
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Based on Fidelity's quantitative models, the portfolio held a bias in favour of euro and yen-denominated bonds, which offset its lower exposure to US dollar-denominated securities. This strategy proved particularly rewarding over the quarter. In addition, the fund's yield curve positioning was a primary contributor to returns during the period. Changes in the interest rate environment saw yield curves change in shape, which provided opportunities for the portfolio manager to benefit from in-house quantitative analysis. Issuer selection was also positive for returns and highlights the importance of thorough credit analysis in the investment process.
The portfolio retained its overweight position in government securities over the quarter. In terms of credit exposure, the largest underweight holdings were among higher-quality corporate bonds, where issues look particularly expensive relative to historic levels. At the other end of the credit-quality scale, the fund maintained a 2% overweight position in sub-investment grade or high-yield bonds. This position represents a small proportion of overall fund assets but includes bonds where Fidelity's credit analysts have a high level of conviction about each company's future prospects.
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Standard Bank International Bond comment - Dec 04
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Thursday, 17 March 2005
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Fund Manager Comment
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The fund's yield curve position was a primary contributor to returns during the period. Changes to the interest- rate environment saw yield curves change in shape, which provided opportunities for the portfolio manager to benefit from in- house quantitative analysis. In particular, the portfolio remained positioned to benefit from further flattening of the US yield curve. The fund's exposure to non-government bonds, particularly BBB- rated US dollar- denominated issues, proved rewarding. At sector level, securities issued by government agencies and supranational organisations were also positive.
The fund manager maintained the fund's significant exposure to the corporate market, although this was reduced to some extent over the quarter. In terms of credit exposure, the manager reduced the portfolio's weighting in BBB- rated issues in favour of government- issued debt. The manager does not believe that current spread levels compensate for the additional risk of these bonds, which therefore look expensive relative to other fixed- income assets. Weightings within the corporate sector are primarily a by-product of this process of issue selection, although the manager currently favours the telecommunications and automobile sectors.
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Standard Bank International Bond comment - Sep 04
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Monday, 29 November 2004
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Fund Manager Comment
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During the quarter, the fund returned 3.4%, marginally under-performing the benchmark index, which returned 3.5% over the same period. At sector level, the portfolio's holdings of securities issued by government agencies and supranational organizations proved negative. From a more positive perspective, issuer selection was the primary driver of performance over the period and highlights the importance of fundamental credit analysis in the investment process. The fund also benefited from its holdings in lower-rated euro-denominated bonds, which performed relatively well. Changes in the shape of the yield curve proved rewarding to returns during the period. In particular, a rise in US yields over the quarter was positive. All non-US dollar positions were fully hedged to eliminate currency risk.
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