M&G Global Macro Bond: May 2024 fund update

• Jim Leaviss is a talented and experienced bond manager and has the support of a strong fixed income team at M&G

• The fund is in the Global Bond sector, rather than Strategic Bond, so the manager has more flexibility to invest in foreign currencies. This means the fund could help to diversify a UK-focused bond portfolio

• The fund has delivered good returns for investors over the long term

• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The manager aims to generate a combination of income and growth over the long term. But as income isn’t a priority it might not appeal to portfolios invested for a high level of income. The fund could be held alongside equity funds for a diverse source of income or combined with more UK-focused bond funds to add geographical diversification to fixed income portfolios.

The fund has overseas currency exposure which could add diversification to a portfolio with currency hedged bond exposure. That said, the currency exposure can lead to large performance swings over the short term. We would therefore expect this fund to be held alongside other bond funds for diversification purposes.

Manager

Jim Leaviss is lead manager of the fund and head of M&G’s public fixed income team. He has worked for M&G ever since joining from the Bank of England in 1997. He’s one of the few global bond fund managers to have successfully adjusted their portfolio in response to changing economic conditions on a global basis over the long term. Leaviss is assisted by a talented and well-resourced team, including Richard Woolnough, Ben Lord and Stefan Isaacs who work in the fixed income team at M&G.

Eva Sun-Wai is co-manager of the fund. Sun-Wai joined M&G in 2018 on their Investment graduate scheme, spending time rotating across several different bond teams. She joined the fund manager team in September 2019 before becoming deputy manager on this fund, as well as lead manager of the M&G Global Government Bond fund, in January 2021. She became co-manager on this fund in 2023, which reflects her level of involvement being more than that of a junior fund manager. That said, Leaviss remains lead manager and ultimately accountable for performance.

Overall, we believe Leaviss has the experience and resources to do an excellent job for long-term investors. While there is significant experience within the wider team our conviction in this fund lies with him.

Process

Jim Leaviss starts with his 'bigger picture' macroeconomic outlook. This includes forming a view on economic growth, interest rates and inflation globally. This helps him decide how much to invest in different areas of the bond market. Leaviss is responsible for how the fund allocates money to different types of bonds and currencies.

The fund’s underlying investments tend to change a lot and can move quite quickly if Leaviss thinks this is necessary. Leaviss is likely to invest more in corporate (including high yield) and emerging market bonds when he is positive, and invest a greater proportion of the fund in government bonds when his outlook is cautious. Investing in high yield and emerging market bonds increases risk. He can also use derivatives to enhance returns. This allows him to quickly vary exposure to different types of bonds and currencies, as well as benefit from falls in asset prices and rising interest rates but is a higher-risk approach.

Leaviss’ freedom to buy bonds issued in different currencies also means movements in currency exchange rates can add or detract value. He therefore has a lot of flexibility in managing the fund, but this can add risk. The fund may invest more than 35% in securities issued or guaranteed by a member state of the European Economic Area or other countries listed in the fund’s prospectus.

In recent months the fund’s duration has been increased from around 7 to 8 years. Duration is a measure of the sensitivity of a bond‘s price to a change in interest rates and is measured in years. In general, the higher the level of duration, the more sensitive the fund is to interest rate changes. Leaviss thinks that at current levels, interest rates are more likely to fall than rise in future. If this proves to be correct, having a higher duration should mean greater returns as rates and yields fall. But of course, there are no guarantees.

The managers have reduced holdings in company bonds in favour of government bonds over recent months. This is largely due to valuations on company bonds increasing, especially towards the end of 2023. Most of the fund is invested in government bonds. The largest investment within government bonds is in US treasuries. The fund also invests in emerging market government bonds, which adds risk.

In terms of currencies, the fund has most exposure to the US dollar, followed by the Euro and the Japanese yen. The fund has little to no exposure to sterling at the moment. The team change their currency exposures based on how expensive they think each currency is and at the current time they think sterling is expensive while the yen is particularly cheap.

Culture

Leaviss and the Fixed Interest team at M&G are some of the most experienced investors in the Global Bond sector. The fact Leaviss can call on the views of this talented team means he can make the most of the fund’s flexible, ‘go anywhere’ mandate to take advantage of his best ideas across the bond market.

Leaviss is incentivised based on the performance of the fund over a number of years, we think this is positive as it aligns his interests with those of investors in the fund. We think there are only a handful of investors with the skill to successfully manage a fund in this sector but the team at M&G are well equipped and have the resources to do an excellent job for long-term investors.

ESG Integration

Environmental, Social and Governance (ESG) analysis is integrated into the research process. Leaviss thinks actively engaging with companies on these issues helps the team manage and potentially reduce risk.

While M&G applies a house-level exclusion for cluster munitions and anti-personnel landmines, each fund manager is encouraged to think about ESG in a way that’s appropriate to their investment mandate.

M&G’s Stewardship and Sustainability team supports fund managers and analysts on ESG matters and coordinates the firm’s stewardship activities. It engages with companies on ESG issues and discharges the firm’s voting responsibilities, in conjunction with the fund managers. The firm publishes full voting reports on a quarterly basis and a rationale is provided for abstentions and votes against management. A voting summary and engagement case studies are made available in the firm’s annual Stewardship report.

While ESG is integrated into bond analysis, this is not a ‘sustainable’ fund and bonds are selected based on their return potential. This means the fund could include bonds from companies considered to be ESG ‘sinners’, such as alcohol sellers.

Cost

This fund has an ongoing annual charge of 0.63%, but we've secured HL clients an ongoing saving of 0.17%. This means you pay a net ongoing charge of 0.46%. This saving is achieved in the form of a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL account charge of up to 0.45% per year also applies, except in the HL Junior ISA, where no account charge applies.

Performance

Leaviss has historically used the flexibility afforded to him in the fund to good effect to deliver strong returns for investors. He won't get it right every time, but we believe experience is vital for a manager of this type of fund and Leaviss is one of the most experienced bond fund managers in the UK. This is why our conviction lies with him as lead manager.

Over the last 12 months the fund lost 5.12%* and has underperformed the IA Global Mixed Bond sector, which gained 2.15%. The biggest cause of losses for the fund over the period has been the currency exposure. The largest negative within currency has come from the Japanese yen, which has lost value and is currently trading at lows against the dollar not seen since the 1990s.

Some of these losses have been offset by gains in the value of their developed market government bond investments during 2023. Investments in corporate bonds and emerging market government bonds had a small positive impact on performance. Past performance isn’t a guide to the future.

At the end of March 2024, the fund’s distribution yield was 3.89%, although remember yields are variable and aren’t a reliable indicator of future income.