Japanese Smaller Companies and Global Bonds are two key themes highlighted this month by Rob Gleeson, analyst at Financial Express Research, in his overview of the crisis, and they are worth a closer look.
Much has been written about the performance of the bond sectors and the inevitability of this performance given their inverse relationship with interest rate, but with Global Bond funds trading at record highs, the million dollar question is: have investors wishing to profit from global bonds missed the boat?
At a time when investors are taking an extremely risk-averse position, volatility levels and returns should be seen as equally important when highlighting potential good investments.
The following five funds have been chosen for a combination of their returns in recent months, their volatility through the last torrid year and their Sharpe ratio.
| Name | 6-month cumulative performance |
1-year cumulative Sharpe to last month end |
1-year cumulative Ann. Volatility to last month end |
| Baring - Global Bond TR |
16.89 | 2.69 | 7.55 |
| Scottish Widows - International Bond TR |
21.72 | 2.49 | 10.5 |
| BlackRock - Global Bond TR |
21.03 | 2.25 | 10.81 |
| Newton - International Bond TR |
20.95 | 2.15 |
11.16 |
| SG - International Bond TR |
21.35 | 2.6 | 11.22 |
| IMA Global Bonds TR |
4.69 |
0.7 | 8 |
| FTSE All Share TR |
-29.3 | -0.08 | 21.35 |
By focusing on high quality international bonds, these funds have managed to minimise risk and achieve some impressive returns. Given how little the funds within this sector are correlated, many of the analytical ratios usually employed are defunct – for that reason we turn to Sharpe, which shows the level of excess return being achieved per unit of risk.
Sharpe ratios of over 2 show that the fund manager is achieving exceptional levels of return for the risk he is taking on. Whilst these figures certainly suggest that the Global Bonds sector offers investors a 'safe haven' in times of trouble, it should be remembered that this sector is diverse and some funds are investing in poorly rated international bonds resulting in high levels of volatility and poor returns.
Beyond bonds
Let’s look beyond the obvious Global Bonds sector at a few other funds that appear to be holding out in the current climate.
Firstly, a fund which invests in the non-cyclical Insurance sector – Hiscox Insurance Portfolio. The FTSE Insurance sector has returned 21.98 per cent in the last six months, and the fund has achieved 12.67 per cent over the last month.
Though there is limited choice when it comes to funds specialising in insurance, the offering from Hiscox does give investors the chance to gain exposure to non-cyclicals. That said, however, the fund’s volatility falls only slightly short of the FTSE All Share.
Secondly, there have been flickers of light coming from Japan. The noticeable highlight is Neptune’s Japan Opportunities fund, a big favourite among the IFAs who select the funds within the AFI and a winner at this year’s Trustnet Awards.
This fund has managed to achieve a startling 60 per cent in the last six months, and a Sharpe ratio of 3.04. With an annualised volatility of 21.86 per cent, the fund compares favourably to the FTSE All Share’s volatility level of 21.35 per cent, especially considering the FTSE All Share lost over 25 per cent of its value in the same period.
One final fund of interest is the Quadris Environmental, another unusual mandate investing along socially responsible lines in sustainable forestry plantations in Brazil. The fund has showed a consistent level of return since launch, extremely low levels of volatility and an excellent Sharpe ratio of 4.9.
Outlook
The immediate outlook for equities is not looking good and there are precious few funds available that offer investors exposure to equities whilst minimising risk and bringing in returns.
The funds which have been highlighted in this piece are far from mainstream, and there can be few investors or advisers who would have had these vehicles on their list of top picks this time last year, so it’s clear that this is a difficult market to identify performers.
This reflects the problem fund managers themselves are having when it comes to identifying individual stocks which will perform well in these most volatile of markets, with macro calls the only ones that appear to work at the moment.
Applying the same philosophy to fund selection, perhaps if you are looking to invest in funds now the trick is to consider the long term and where you should be exposed in that light - avoiding the temptation to second guess a market that will burn even the best, and sticking to a balanced approach to portfolio construction, designed to achieve your long term investment goals.
In the meantime, there will be plenty more volatility where the last lot came from, so prepare for that, and cross your fingers that Darling is right and the Keynesian approach pays off.
*Best performing Global Bond funds over the past year
Source: Financial Express Analytics
* While this chart shows the best money may well have been made already, given the expectation that interest rates will continue to fall and equity markets as a whole have not bottomed out, there is still potential to be had from investing in the Global Bonds sector.