Sector Focus: Global Bonds

According to the IMA, all funds in the Global Bonds sector have "at least 80 per cent invested in fixed interest securities, unless they have more than 80 per cent exposure to the UK, in which case they will be classified under the relevant Sterling sector".

With equity markets becoming increasingly volatile over the last few months, many investors have sought refuge away from riskier assets.

As yields in traditional bond funds have looked comparatively poor, global bonds offer investors the opportunity to diversify their portfolio by exposing to a variety of geographical economies. Managers also have the flexibility to move around international bond markets in search of the best opportunities.

The sector as a whole is incredibly diverse. It offers funds for a variety of risk profiles, from corporate bonds through to high yield and emerging market debt investments.


Key funds

With 74 funds currently listed, the sector offers a lot of diversity and it is not as simple as looking for the funds with the best returns. It is more helpful to consider the risk/reward profile of individual investments.

Investec Emerging Markets Local Currency Debt is one of the standout performers in these terms. It is one of the riskier offerings in the sector, with an annual volatility score of 13 per cent over five years compared with 7.5 per cent from the sector average. However, its performance has more than justified the risk profile. It has returned 123 per cent over five years compared with 49 per cent from the sector average.

Baring Global Bond is held in high regard in the industry. Headed up by FE Alpha Manager Colin Harte, the fund is less volatile than the sector average and has returned more. The manager's policy is to invest in high quality bonds, including government or corporate issues rated AA or better.

The FE Triple Crown-rated £491m Old Mutual Global Strategic Bond fund is also worth a look. Headed-up by FE Alpha Manager Stewart Cowley, the fund has returned 97 per cent over the last decade compared with 73 per cent from the sector average.


Risks and considerations

The diversity of the sector means that the risks faced by investors are dependent on strategy. However, geographical risks must be a key consideration, as some markets carry greater risks than others.

Global Bond funds exposed to China must consider the slowdown of the economy in the wake of monetary tightening policy, those exposed to the US face risks from the deficit crisis and the issue of sovereign credit continues to reign in Europe.

As with investing in any debt security, investors must also consider default risk. The threat of default is diluted by the fund's diversification into lots of markets and many different types of assets. The lower the credit rating of an individual asset, the higher the chance of a default.


Comparable sectors

Funds from other bond sectors are allowed to invest in global securities but their primary focus is on the UK market. This means that Global Bond remains quite separate from other sectors.


Our view

With domestic yields looking stifled at the moment, global bonds are an increasingly popular way to access income, but investors who are using bonds as a cautious part of their portfolio should be aware of the risks involved in looking overseas.