Demand for safe havens pushes bonds up

FUND FOCUS: FIXED INTEREST FUNDS: Best performer YTD:AXA Financial Newton BNY Mellon Global Bond +18.6%

Worst performer YTD:

MGI Funds PLC Global Bond US Dollar -3.5%

DESPITE THE turmoil in the sovereign debt of peripheral European countries – notably Ireland – demand for safe-haven assets is pushing bond prices up in major economies worldwide.

According to Moneymate, so far in the year to August 20th, Irish gross domestic guaranteed funds invested in fixed-interest products returned 6.4 per cent on average or 7.5 per cent in the previous 12 months.

Best of the bunch is AXA Financial’s Newton BNY Mellon Global Bond, which is up by 18.6 per cent in the eight or so months to August 20th, or by 19.3 per cent in the last 12 months.

The fund invests in a portfolio of international sovereign, government, agency, corporate, bank and asset-backed debt and debt-related securities and in derivatives, with a credit rating of BBB or better. It has a concentrated portfolio of between 25-40 holdings.

According to John Day, fund manager with Newton Investment Management, the fund looks to invest in sovereign debt of “countries that are facing up to their responsibilities and implementing austerity measures”.

Its biggest geographical allocation is to the US at 18.2 per cent, followed by Britain at 14.2 per cent and Germany at 14.1 per cent, while its biggest holding is in US treasury notes at 5.7 per cent, followed by German government bonds at 4.3 per cent and Canadian government bonds at 4.1 per cent.

The fund doesn’t have exposure to countries such as France, where governments are “not facing up to the issues”, says Day, but has a 2 per cent allocation to Ireland, bought last December. “We’re pretty comfortable with Ireland.”

Looking ahead, Day expects the bond yields of core markets to stay low, or go even lower in the medium term, as demand continues to rise for fixed income products and inflationary pressures remain at bay.

The major risk to such a scenario comes from a rebound in economic growth – which at the moment looks to be some time in the future for western markets.

Less attractive in the current environment is MGI Funds’ Global Dollar Bond Fund, which has lost 3.5 per cent so far this year and is down by 1.8 per cent over the past year.