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Because I’m Happy… about Fixed income
Graeme Abell
Connect 4, November 2019
For investment professionals only
2
Learning objectives
Examine
the global macro-
economic environment
as it pertains to Fixed
Income, particularly
understanding the risks
of Global recession
Explain
the market case for
active and/or passive
investment across the
various Fixed Income
markets, particularly
focusing on risk
management
Present
the case for a more
global approach to Fixed
Interest and the risks
involved
3
Agenda
How do we view the world currently?
2019 – No alarms and no surprises?
Active v Passive
Some wizard M&G fund solutions
4
2019 – No alarms and no surprises?
5
Happy returns?
Source: M&G, Bloomberg, ICE Bank of America Merrill Lynch, JP Morgan, 15 October 2019
YTD asset price performance
No alarms so far!
Government bonds EMsCorporate bonds
0%
5%
10%
15%
6
How is the world today? No need to be clueless!
Source: M&G, 2019
Overview of current investment themes globally
FAANGs ain’t what they used to be!
7
Image sources: By Foreign and Commonwealth Office - Prime Minister of Israel, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=69902413, By Rwendland - Jeremy Corbyn, 2016 Labour Party
Conference 1.jpg, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=53026238
How could Brexit impact bond markets?
GBP
Gilt Yields
Credit spreads
1. Hard Brexit/
No deal
Down
Down(risk off)
Widen(uncertainty)
3. Political
Crisis
Down
Up
Widen(uncertainty)
Sorry to mention the B word…! (how embarrassing!)
2. Soft (Plan B)
/ No Brexit
Up
Up
Down(risk on)
8 Source: Bloomberg, 30 September 2019
Some asset classes showing strength…UK long-dated bonds vs UK equity
Bonds have been the place to BBB!
0
100
200
300
400
500
600
700
800
900
Long dated £ BBB corp Long dated Gilts FTSE 100
To
tal re
turn
(re
ba
se
d to 1
00
as a
t 31
/12
/19
96
)
+294%
+522%
+707%
9 Source: Bloomberg, 30 June 2019
Sadly shocking…The risk-free asset is certainly not volatility-free!
80
90
100
110
120
130
140
150
160
31/10/2012+50:502:738
04/12/2012
07/01/2013
08/02/2013
14/03/2013
17/04/2013
21/05/2013
24/06/2013
26/07/2013
29/08/2013
02/10/2013
05/11/2013
09/12/2013
10/01/2014
13/02/2014
19/03/2014
22/04/2014
27/05/2014
30/06/2014
01/08/2014
04/09/2014
08/10/2014
11/11/2014
15/12/2014
16/01/2015
19/02/2015
25/03/2015
28/04/2015
02/06/2015
06/07/2015
07/08/2015
10/09/2015
14/10/2015
17/11/2015
21/12/2015
22/01/2016
25/02/2016
30/03/2016
03/05/2016
06/06/2016
08/07/2016
11/08/2016
14/09/2016
18/10/2016
21/11/2016
23/12/2016
26/01/2017
01/03/2017
04/04/2017
08/05/2017
09/06/2017
13/07/2017
16/08/2017
19/09/2017
23/10/2017
24/11/2017
28/12/2017
31/01/2018
06/03/2018
09/04/2018
11/05/2018
14/06/2018
18/07/2018
21/08/2018
24/09/2018
26/10/2018
29/11/2018
02/01/2019
05/02/2019
11/03/2019
12/04/2019
16/05/2019
19/06/2019
23/07/2019
26/08/2019
27/09/2019
Pri
ce in G
BP
UK 30 year gilt
+34
%
-16%
10 Source: Bloomberg, 30 September 2019
Sadly shocking…
100
110
120
130
140
150
160
Sep-15 Jul-16 May-17 Mar-18 Jan-19
Pri
ce in G
BP
UK 30-year gilt
+34% -16%
The risk-free asset is certainly not volatility-free!
11
How do we view the world currently?
12
Let’s get scientific…some key recession indicators
Source: Bloomberg, 30 June 2019 (latest data available)
Housing the not so magnificent 7
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
3
4
5
6
7
8
9
10
11
12
13
US housing inventory (months)
7 months
13
Let’s get scientific…some key recession indicators
Source: Bloomberg, 31 July 2019 (latest data available)
Oil, volatile but not alarming
Oil price (yoy change)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
-100%
-50%
0%
50%
100%
150%
200%
14
Let’s get scientific…some key recession indicators
Source: Bloomberg, 31 August 2019
Treasuries
US Treasury yield curve
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
15
Let’s get scientific…some key recession indicators
Source: M&G, Bloomberg, 30 June 2019
Unemployment
Steadily falling unemployment
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
Unem
plo
ym
ent
rate
UK US Europe
16
Let’s get scientific…some key recession indicators
Source: Bloomberg, 31 August 2019
Wages
0
0.2
0.4
0.6
0.8
1
1.2
-6%
-4%
-2%
0%
2%
4%
6%
8%
USA employment rate (non farm) UK employment rate all industries
Total non-farm payrolls (yoy change)
17
Not down?
Source: FOMC press conference projections materials 19 June 2019
US rates …
FOMC ‘dot plot’ projections for 2019/2020/2021/LT
18
Stopping it spreading…Historic level of investment grade spreads
Source: Bloomberg, 30 September 2019 (the chart is considering data starting from 31 December 1996)
Market cheaper Market more expensive
Global
investment
grade
US
investment
grade
UK
investment
grade
Global high
yield
56%39%
67%
33%
19
EM debt…bigger and more liquid
Source: M&G JP Morgan, October 2018. * Debt issued in hard currency.
DMIG corporates
8,800EM
Local corporates
7,800
EMLocal sovereigns
8,000
EM external sovereigns* 1,100
DM HY corporates 2,100
EM external corporates* 2,200
Total debt stock by asset class (US$bn)
20
What yield?...
Source: Bloomberg, BofA Merrill Lynch indices, 30 September 2019.
…Oh THAT yield!
0%
2%
4%
6%
8%
10%
12%
14%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Yie
ld
Developed Market Government Bond Index EM Hard Currency Government Bond Index
EM Local Currency Government Bond Index
0.64
5.215.16
21
Too risky – according to popular opinion…
Source: ICE Bank of America Merrill Lynch Global Research, 30 September 2019
Current global HY default rate
Issuer default rates by region
Historic high yield default rates by region
0
5
10
15
20
25
30
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
LT
M issue
r d
efa
ult r
ate
(%
)
US HY EU HY EM HY
1.4%
22
Far eastern promise?
Sources: M&G, JPMorgan indices: JPM EMBI Global Diversified Blended Spread Index, JPM CEMBI Diversified Broad Composite Blended Spread Index, 30September 2019
EM Government bonds EM Corporate bonds
68%
32%
60%
40%
Historic level of EM USD spreads since 2010
Market cheaper
Market more expensive
23
Active v Passive
24
Rewarding winners or rewarding sinners?More debt = more investment
What do your emotions tell you?
25
Is your intuition right?
Source: M&G, PIMCO, Morningstar Direct, 31 December 2016. For illustrative purposes only. The three largest categories are based on numbers of active mutual funds and ETFs with at least one-year return histories. Based on Morninstar U.S. ETF and U.S. Open-End Fund categories (institutional shares only). To avoid potential survivorship bias, we included funds and ETFs that were live at the beginning of each sample period but were liquidated or merged as of 31 December 2016. For the High Yield Bond and Short-Term Bond categories, 10-year outperformance numbers are not available due to the lack of passive peer groups. Shutterstock image by stock-photo-digital-illustration-dna-170525096
Active bond funds have a high probability of outperformance
Intermediate-
term bond
High yield
bonds
Short-term
bonds
All bond
categories
Bonds100
90
80
70
60
50
40
30
20
10
0
Per
cen
t (%
)
Percentage of active funds that outperformed their median passive peers after fees
1 year 3 year 5 year 7 year 10 year
26
Is your intuition right?Active bond funds have a high probability of outperformance
Source: Morningstar Direct, 30 June 2018. Based on Morningstar US ETF and US open-ended fund categories (institutional shares only)
10 year average excess return of active funds within each category (relative to their benchmark)
1.88
1.02
0.870.79
-0.24-0.5
0
0.5
1
1.5
2
Multisector bond World bond Short-term bond Intermediate-termbond
High yield bond
Exce
ss r
etu
rn (
%)
27
Beware…. global bond indices can be fraught with dangers!
Source: Pimco.com./BIS and Haver, March 2018
Are you invested where you want to be?
US Treasuries US Govt related
US IG corporates US Securitised
US Treasuries US Govt related US IG CorpsUS Securitised Other US Other EMEM-Latin America EM-Asia Other DMUK Japan Eurozone
Sector decomposition
– Bloomberg Barclays US aggregate bond index Global fixed income market
0% EM 14% EM !
28
When could you choose to implement a passive approach? Think about the following situations……
• Keep down investment costs
• Quick tactical index exposure
• You are managing duration calls
• You are managing credit calls
29
An ocean of risk…The corporate bond universe is extremely broad and deep
Source: M&G, Bloomberg, BofA Merrill Lynch Indices, June 2019
$ b
illi
on
s
0
2000
4000
6000
8000
10000
12000
14000
Dec 06 Dec-08 Dec-09 Jun-11 Jun-14 Jun-17 Jun-19
Number of issues outstanding
Face value global IG Index Face value global HY Index
…and there be sharks
30Source: ICE Bank of America Merrill Lynch, Bloomberg, 31 December 2018. Note: calculation based on face value. *the index had some non-rated bonds up to 2000; we assigned these bonds to the average credit
rating of the rated bonds.
…more and more debt – of less and less quality!Credit quality evolution over time – increased default risk!
4.3
4.5
4.7
4.9
5.1
5.3
5.5
5.7
5.9
6.1
USD IG EUR IG* GBP IG
AA
A
AA-
A+
A-
BBB+
Cre
dit r
atin
g
Investment grade corporate bonds
31
…and duration continues to rise while rewards fall, not a happy situation!
These risks will require careful management
Source: M&G, Bloomberg, 30 September 2019
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
0%
1%
2%
3%
4%
5%
6%
7%
8%
Years
Barclays Global Aggregate Corporate Index yield-to-worst and interest rate duration
Yield-to-worst (lhs) Interest duration (years, rhs)
32
Modern Monetary Theory
• Issue debt in your own currency
• GDP growth greater than borrowing rate/coupon
• Boost growth
• Debt pays for itself
More debt
33
Modern Monetary Theory
Yet more risk!
Modern
Monetary
Theory
Magic
Money
Tree
34Source: www.businessinsider.com. Image sources: By US House of Representatives - https://ocasio-cortez.house.gov/about, Public Domain, https://commons.wikimedia.org/w/index.php?curid=75556027. By
Michael Vadon - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=41703476
Alexandria Ocasio Cortez
More debt = more risk
“Government deficits, less concerning
if a country controls own currency
and issues debt in that currency”
“$2 trillion, $22 trillion, $222 trillion
– what’s the difference?”
35
Image sources: By Rwendland - Own work, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=50258810. By Original: Five Star MovementVectorization: NiloGlock - Il blog delle stelle - Simbolo
consegnato: siamo pronti per l'ultimo mese e mezzo di #Rally per l'Italia, Public Domain, https://commons.wikimedia.org/w/index.php?curid=65648346. By Presidency of the Italian Republic, Attribution,
https://commons.wikimedia.org/w/index.php?curid=81693558
What could go wrong?
36
Summary slide
• Fixed income – benefiting from the risk off trade
• But more debt of lower quality, higher duration and less reward
• Risk management becomes more crucial
• Active for performance, passive for charges
37
Learning objectives
Examine
the global macro-
economic environment
as it pertains to Fixed
Income, particularly
understanding the risks
of Global recession
Explain
the market case for
active and/or passive
investment across the
various Fixed Income
markets, particularly
focusing on risk
management
Present
the case for a more
global approach to Fixed
Interest and the risks
involved
38
Some wizard M&G fund solutions
39
M&G Absolute Return Bond Fund
The main risks that could affect performance are set out below:
The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise.
There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.
An ‘absolute return’ fund may not move in line with market trends or fully benefit from a positive market environment.
The fund may use derivatives to profit from an expected rise or fall in the value of an asset. Should the asset’s value vary in an unexpected
way, the fund will incur a loss. The fund’s use of derivatives may be extensive and exceed the value of its assets (leverage). This has the effect
of magnifying the size of losses and gains, resulting in greater fluctuations in the value of the fund.
The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment. •
Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the
capital. All of these events can reduce the value of bonds held by the fund.
In exceptional circumstances where assets cannot be fairly valued, or have to be sold at a large discount to raise cash, we may temporarily
suspend the fund in the best interest of all investors.
The fund could lose money if a counterparty with which it does business becomes unwilling or unable to repay money owed to the fund. Further
details of the risks that apply to the fund can be found in the fund's Prospectus.
Wherever a reference or indication of past performance is shown, please note, past performance is not a guide to future performance.
It is also important to note that
The Fund allows for the extensive use of derivatives. The fund may invest more than 35% in securities issued by any one or more of the
governments listed in the fund prospectus. Such exposure may be combined with the use of derivatives in pursuit of the fund objective. It is
currently envisaged that the fund’s exposure to such securities may exceed 35% in the governments of Germany, Japan, UK, USA although
these may vary subject only to those listed in the prospectus.
40
M&G Global Macro Bond Fund
The main risks that could affect performance are set out below:
The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund
will achieve its objective and you may get back less than you originally invested.
Investments in bonds are affected by interest rates, inflation and credit ratings. It is possible that bond issuers will not pay interest or return the capital. All of these events can
reduce the value of bonds held by the fund.
High yield bonds usually carry greater risk that the bond issuers may not be able to pay interest or return the capital.
The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.
The fund may use derivatives to profit from an expected rise or fall in the value of an asset. Should the asset’s value vary in an unexpected way, the fund will incur a loss. The
fund’s use of derivatives may be extensive and exceed the value of its assets (leverage). This has the effect of magnifying the size of losses and gains, resulting in greater
fluctuations in the value of the fund.
Investing in emerging markets involves a greater risk of loss due to greater political, tax, economic, foreign exchange, liquidity and regulatory risks, among other factors. There
may be difficulties in buying, selling, safekeeping or valuing investments in such countries.
In exceptional circumstances where assets cannot be fairly valued, or have to be sold at a large discount to raise cash, we may temporarily suspend the fund in the best
interest of all investors.
The fund could lose money if a counterparty with which it does business becomes unwilling or unable to repay money owed to the fund. Further details of the risks that apply
to the fund can be found in the fund's Prospectus. Wherever a reference or indication of past performance is shown, please note, past performance is not a guide to future
performance.
It is also important to note that
The Fund allows for the extensive use of derivatives
The fund may invest more than 35% in securities issued by any one or more of the governments listed in the fund prospectus. Such exposure may be combined with the use
of derivatives in pursuit of the fund objective. It is currently envisaged that the fund’s exposure to such securities may exceed 35% in the governments of Germany, Japan,
UK, USA although these may vary subject only to those listed in the prospectus.
41
M&G Emerging Markets Bond Fund
Risks associated with this fund
The value of investments and the income from them will rise and fall. This will cause the fund price, as well as any income paid by the fund, to fall as
well as rise. There is no guarantee the fund will achieve its objective, and you may not get back the amount you originally invested.
The value of the fund may fall if the issuer of a fixed income security held is unable to pay income payments or repay its debt (known as a default).
When interest rates rise, the value of the fund is likely to fall.
Changes in currency exchange rates will affect the value of your investment.
The fund will invest in emerging markets which are generally smaller, more sensitive to economic and political factors, and where investments are
less easily bought and sold. In exceptional circumstances, the fund may encounter difficulties when selling or collecting income from these
investments, which could cause the fund to incur a loss. In extreme circumstances, it could lead to the temporary suspension of dealing in shares in
the fund.
The fund may use derivatives in a limited way to gain exposure to investments exceeding the value of the fund (leverage). This my cause greater
changes in the fund’s price and increase the risk of loss.
The fund may use derivatives with the aim of profiting from a rise or a fall in the value of an asset (for example, a company’s bonds). However, if the
asset’s value varies in a different manner, the fund may incur a loss.
Where market conditions make it hard to sell the fund’s investments at a fair price to meet customers’ sale requests, we may temporarily suspend
dealing in the fund’s shares.
Some transactions the fund makes, such as placing cash on deposit, require the use of other financial institutions (for example, banks). If one of
these institutions defaults on their obligations or becomes insolvent, the fund may incur a loss.
Wherever a reference or indication of past performance is shown, please note, past performance is not a guide to future performance.
It is also important to note that:
The Fund allows for the extensive use of derivatives
42
Performance over time
Source: Morningstar, Inc. and M&G UK database, 30 September 2019, sterling I share class, income reinvested, price to price. The fund’s sterling I class shares launched
on 16/12/2011. Performance data shown prior to this date is that of the fund’s sterling X share class. Benchmark returns stated in GBP terms.
M&G Global Macro Bond Fund
Strong track record over the long term
90
110
130
150
170
190
210
230
250
2006 2007 2008 2008 2009 2010 2010 2011 2012 2012 2013 2014 2014 2015 2016 2016 2017 2018 2018 2019
To
tal re
turn
(3
1/1
2/2
00
6 =
10
0)
M&G Global Macro Bond Fund (IA) Global Bonds (GBP)
Past performance is not a guide to future performance
Performance charts © 2019 Morningstar Inc., All Rights Reserved. The information contained within: (1) is proprietary to Morningstar and/or its content providers; (2) may not be
copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses
arising from any use of this information.
YTD 2018 2017 2016 2015 2014
% % % % % %
M&G Global Macro Bond Fund 9.2 3.7 -3.8 25.3 0.9 6.0
(IA) Global Bonds Sector Average 8.4 0.1 1.6 16.7 -0.7 4.6
43
99.5
101.5
103.5
105.5
107.5
109.5
111.5
113.5
Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 Dec-18 Apr-19 Aug-19
To
tal re
turn
(re
ba
se
d to
10
0
(13
/12
/16
)
3-month GBP LIBOR + 2.5% M&G Absolute Return Bond Fund (Gross)
Past performance is not a guide to future performance
Performance vs LIBOR GBP 3 month – offered rate + 2.5%
Source: Morningstar, Inc 30 September 2019. Sterling Class I shares, income reinvested, price-to-price basis. Fund performance is shown
as gross returns, which exclude the Ongoing Charge Figure (OCF)
Performance since inception - M&G Absolute Return Bond Fund
YTD
%
2018
%
2017
%
2016
%
2015
%
2014
%
M&G Absolute Return Bond Fund (Gross) 7.3 -0.7 3.8 N/A N/A N/A
M&G Absolute Return Bond Fund (Net)6.8 -1.4 3.0 N/A N/A N/A
3-month GBP Libor +2.5% 2.5 3.2 2.8 3.1 3.1 3.1
44
M&G Emerging Markets Bond Fund
Source: Morningstar Inc., UK database, 30 September 2019, Sterling I share class, income reinvested, price to price. *Data as at end April 2019
Performance in sterling
Past performance is not a guide to future performance
YTD 2018 2017 2016 2015 2014
% % % % % %
M&G Emerging Markets Bond Fund 16.1 0.6 3.5 32.2 3.6 10.9
(IA) Global Emerging Markets Bond Sector Average 11.0 -3.2 4.9 23.1 -4.1 3.7
Benchmark* 14.2 2.0 1.5 31.3 1.2 8.5
90
110
130
150
170
190
210
Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16 May-17 Dec-17 Jul-18 Feb-19 Sep-19
M&G Emerging Markets Bond Fund Benchmark*
To
tal re
turn
(01
/12
/2013
= 1
00
)
45
For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This financial promotion is
issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products.
The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.
