Ignis’ Absolute Return Government Bond Fund has seen strong performance in recent weeks following further positive signs for the global economy.
US and UK economic data has continued to be strong, particularly in the UK, where the composite PMI data is running at the highest levels since the series began in 1988. Negative concerns over Japan, China and Europe have also abated following a period of positive data.
The improving global growth outlook has prompted bond yields to rise, leading to hawkish statements from both Federal Reserve chairman Ben Bernanke and new Bank of England governor Mark Carney. This has meant inflation expectations have remained well anchored.
The GBP1.6bn Absolute Return Government Bond Fund has performed strongly during this period rising 2.3 per cent in August and is now up 6.2 per cent over one year.
The portfolio’s short five year/five year forward rates positioning has been one of the main drivers for performance. Following the sell-off, the five year/five year short position was switched to the three year/two year forward rates. In the most recent sell off, it has been the three year/two year part of the curve that has led the rise in yields.
In addition to the rates position, the fund’s long sterling/short euro trade has also benefited performance, particularly due to extremely strong UK data. Preliminary Q2 GDP data indicates the UK was the fastest growing developed economy during this period.
“There is no change to our expectation that data will continue to be strong over the next few months,” says Ignis Absolute Return Government Bond Fund manager Russ Oxley (pictured). “Both the UK and the US central banks have issued forward guidance linking base rates to unemployment rates. We believe strong data will bring unemployment rates down faster than expected and consequently rate expectations and bond yields will continue to rise.”
Bullish on US/UK, bearish on Europe: “We continue to expect the US dollar and sterling to strengthen given relative growth outlooks, while we remain short of the euro on expectations of continued disappointing growth in Europe and as a hedge against further problems in the Eurozone. We believe the reduction of global stimulus as the Fed tapers its QE programme will prompt a testing period for other global economies as global real interest rates rise. Europe may witness another crisis and any policy response may be muted in the short-term ahead of the German elections.”
Growth recession in China: “Although we expect Chinese growth to moderate longer term, in the short term we are conscious we could see a period of positive data. We have therefore reduced risk on a number of our China growth recession theme trades. We continue to manage our short of the Australian dollar on a tactical basis. On a long-term view, we still expect weaker Chinese growth and the removal of ultra-loose US monetary policy should give rise to further Australian currency weakness.”
Short Yen: “Political change in Japan is leading to ultra-loose monetary policy. We remain short of the yen as Japanese authorities continue to target polices that will weaken the yen and lead to higher domestic inflation.”
Low inflation: “We believe global inflationary pressures are low and will remain so as Chinese growth slows and Japan’s weaker yen exports disinflationary pressures to the wider global economy. The fund has a bias to be short of inflation. This is currently focused in UK markets where longer-dated forward rate inflation expectations are above four per cent.”
