Name selection and sector allocations key for global fixed income winner

Staff Writer

Financial Newswire

26 September 2022

A focus on investment-grade name selection and sector allocations was key for the Capital Group Global Corporate Bond Hedged fund in the market sell-off over the past year, according to Capital Group investment director Keiyo Hanamura.

Winner of the 2022 Financial Newswire-SQM Research Fund Manager of the Year Global Fixed Income award, the Capital Group Global Corporate Bond Hedged fund invests in corporate investment-grade bonds worldwide.

“We try to keep this fund very simple, so we don’t take a lot of macro risk and we don’t take high yield at all,” Hanamura said.

“Many of the funds out there try to increase the yield by adding high yield or taking more macro risk, but that’s not what we do. We try to generate 90% of our excess returns from bottom-up research, so name-selections and sector allocations.”

With the US Federal Reserve hiking rates, and both bond and equity markets getting hammered over the year, Hanamura said it felt like there was “nowhere to hide”.

“But there were still differences between asset classes, obviously high yield spread sold off a lot more than investment grade, so by having a higher quality asset, even in the risky asset, you were better off, you will lose less compared to, let’s say emerging markets high yield,” he said.

 The fund looks to financials such as major U.S. banks, and also saw opportunities in Euro-denominated names as Europe faced war in Ukraine, high energy prices and rising inflation.

Hanamura said looking ahead, there were now more opportunities for name selection.

“Up until last year we were in the QE (quantitative easing) period, so everything was getting crushed,” he said.

“Spreads were below 100 basis points so there’s not much of a name selection you can do. Everything was expensive, so all you can do is go underweight. But now the dispersion is a lot wider, so if you plot a spread dispersion, it’s got a lot fatter tail, so there’s a lot more name selection opportunities. So I think this is the time for Capital to shine and over the past 10 years we have delivered really stellar investment results. The return is closer to the level of high yield while retaining the same level of volatility as the benchmark.”

The Brandywine Global Opportunistic Fixed Income (A Class) fund won the runner-up award in the Global Fixed Income category.

David Hoffman, Head of Global Fixed Income at Brandywine Global Investment Management, said the fund’s opportunistic strategy meant they could rotate the portfolio from market to market.

“This is a powerful tool in preventing us from getting boxed into negative yield curve shifts in any one particular market,” Hoffman said. “Our process enables us to enter a market where rates have risen at a more opportune time, when the more attractive yield starts to attract capital inflows in the market which can provide a lift to the currency also.”

Hoffman said the fund was underweight developed market duration, specifically Europe and Japan, for most of the year, which helped during the sell-off in developed market bonds.

“Many competitors tend to be more benchmark aware which oftentimes leaves them with a larger duration exposure to developed market bonds,” he said. “Given our more flexible approach, we were able to avoid some of those sectors which sold off the most.”