Are hedged global bond funds the same as strategic bond funds?

aroominyork
aroominyork Posts: 2,802
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edited 15 June 2020 at 7:51PM in Savings & investments
The question pretty much says it. Is the hedged version of a global bond fund which invests across the fixed income universe (government and corporates) such as the hedged version of Pimco GIS Global Bond, directly comparable to a Sterling strategic bond fund?
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  • Bonds are all overpriced now with a downside risk and no upside potential; I wouldn't buy any bonds right now.
    I expect bowlhead99 will be along to answer the technical details in your question, it's right up his street.
  • Linton
    Linton Posts: 17,064
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    Hedged bond funds are very differenty to Stretegic Bond funds.
    A hedged bond fund will generally invest in one type of bond (or pehaps a balanced set of types) and then use financial wizardry to remove currency variations.  For example if a $ bond increased in value by 10% but so did the value of the £ against the $, then your net gain without hedging would be zero, whereas with a hedged fund it would be 10%.  Of course hedging can work to your disadvantage as well. Whether hedging is useful is arguable, but it makes some people happier.

    A strategic bond fund will vary its bond allocations depending on market conditions, sometimes investing significantly in say Australian government stock and at other times more in riskier corporate bonds.  So it is highly managed as opposed to a global bond fund which could well simply follow a bond index.

  • Linton said:
    A strategic bond fund will vary its bond allocations depending on market conditions, sometimes investing significantly in say Australian government stock and at other times more in riskier corporate bonds.  So it is highly managed as opposed to a global bond fund which could well simply follow a bond index.
    Which may also work to your disadvantage as well depending on the skill/luck of the manager.

  • A_T
    A_T Posts: 959
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    Bonds are all overpriced now with a downside risk and no upside potential; I wouldn't buy any bonds right now.
    I expect bowlhead99 will be along to answer the technical details in your question, it's right up his street.
    Plenty would disagree with that.
  • aroominyork
    aroominyork Posts: 2,802
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    edited 16 June 2020 at 11:30AM
    Linton said:
    Hedged bond funds are very differenty to Stretegic Bond funds.
    A hedged bond fund will generally invest in one type of bond (or pehaps a balanced set of types) and then use financial wizardry to remove currency variations.  For example if a $ bond increased in value by 10% but so did the value of the £ against the $, then your net gain without hedging would be zero, whereas with a hedged fund it would be 10%.  Of course hedging can work to your disadvantage as well. Whether hedging is useful is arguable, but it makes some people happier.

    A strategic bond fund will vary its bond allocations depending on market conditions, sometimes investing significantly in say Australian government stock and at other times more in riskier corporate bonds.  So it is highly managed as opposed to a global bond fund which could well simply follow a bond index.

    Thanks Linton. Maybe I should have been clearer that I meant an actively managed bond fund. The Pimco one I mentioned as an example "is a diverse, actively managed portfolio of global fixed-income securities... The fund’s extensive global opportunity set can offer diversified sources of returns, benefitting from the manager’s views on interest rates, exchange rates, credit and country trends...". How is that different to a strategic bond fund which can invest globally and then hedge back to Sterling?
    This graph shows the hedged (yellow) and unhedged (green) versions of the Pimco fund, and IA Sterling Strategic Bond (red). The hedged version and the strategic bond sector are very similar, although of course other funds will vary.
    Performance Chart - Portfolio


  • Linton
    Linton Posts: 17,064
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    I hold Jupiter Strategic Bond fund which has performed significantly better than the IA average.  From the JSB documentation they do hedge and looking elsewhere it is a requirement of the IA Sterling Strategic Bond sector that 70% of underlying assets must be in sterling or hedged to sterling.
  • bowlhead99
    bowlhead99 Posts: 12,295
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    The ABI and IA definitions of their 'sterling strategic bond' sector are consistent in the part of their respective definitions of the part that says: 
    • Funds which invest at least 80% of their assets in Sterling-denominated (or hedged back to Sterling) fixed interest securities...

    [a difference between the definitions is that for the IA classification, convertibles, preference shares and permanent interest-bearing shares (PIBs) are excluded from core holdings in the fixed income sector classification, but the use of them isn't inhibited, they just don't count for the threshold checks on 'what's the core of what you're doing]

    So, if you are investing in a fund that can pick from different parts of the fixed income universe and it hedges those returns to sterling it could probably qualify for sterling strategic bond category. 

    PIMCO may not choose to call themselves a 'sterling strategic bond fund' given that the other nonhedged classes of the exact same fund are not sterling bond funds and the 'global bonds' category is likely more appropriate. 

    Even for other UK-focused sterling strategic bond funds, they may technically qualify for other categories based on the core of what they're doing at any point in time; but per definitions,  "the asset allocation of these funds could theoretically place the fund in one of the other Fixed Interest sectors. The funds will remain in this sector on these occasions since it is the Manager's stated intention to retain the right to invest across the Sterling fixed interest credit risk spectrum."

    Generally when fund shopping you would look in the sector classifications that might meet your needs, which could cross multiple categories from time to time - so when comparing the results to 'what you could have had', don't be afraid to look far and wide for 'what you could have had'.
  • aroominyork
    aroominyork Posts: 2,802
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    edited 16 June 2020 at 4:19PM
    PIMCO may not choose to call themselves a 'sterling strategic bond fund' given that the other nonhedged classes of the exact same fund are not sterling bond funds and the 'global bonds' category is likely more appropriate.
    Generally when fund shopping you would look in the sector classifications that might meet your needs, which could cross multiple categories from time to time - so when comparing the results to 'what you could have had', don't be afraid to look far and wide for 'what you could have had'.
    So it's useful to know when looking for an actively managed and hedged (or mostly hedged) bond fund, that some of them sit in categories other than Sterling strategic bond. Pimco's rationale for placing it in the global bond sector is sound, given the unhedged core version (and they also hedge the fund into other currencies.)
    Linton said:
    I hold Jupiter Strategic Bond fund which has performed significantly better than the IA average.  From the JSB documentation they do hedge and looking elsewhere it is a requirement of the IA Sterling Strategic Bond sector that 70% of underlying assets must be in sterling or hedged to sterling.
    I may soon increase my bond allocation quite significantly and I came across Pimco when looking for alternatives to Jupiter, which would be my go-to fund. But Jupiter wins out: Jupiter Strategic Bond in yellow, Pimco GIS Global Bond hedged in green.
    Performance Chart - Portfolio

  • I'm often a bit puzzled by the faith some hold in strategic bond funds. What can they do that you couldn't replicate with a bond tracker fund or two?
    So I thought I'd try a quick comparison of the two bond funds just mentioned with two tracker funds: to represent gilts, Vanguard UK Government Bond Index Fund (in orange), and to represent investment-grade sterling corporate bonds, iShares £ Corporate Bond ex-Financial ETF (ISXF) (in blue).

    That is only over 5 years, not 10.
    But the "strategic" funds both look pretty poor in this comparison. In most years, they are beaten by both the gilts tracker and the corporate bonds tracker.
    If you count a difference of less than 1% as a tie, then Jupiter beat gilts once, and lost twice, with 2 ties.
    PIMCO never beat gilts, and lost 4 times, with 1 tie.
    Neither Jupiter nor PIMCO ever beat corporate bonds. Jupiter lost twice, with 3 ties. PIMCO lost 4 times, with 1 tie.
  • Linton
    Linton Posts: 17,064
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    edited 16 June 2020 at 5:11PM
    I'm often a bit puzzled by the faith some hold in strategic bond funds. What can they do that you couldn't replicate with a bond tracker fund or two?
    So I thought I'd try a quick comparison of the two bond funds just mentioned with two tracker funds: to represent gilts, Vanguard UK Government Bond Index Fund (in orange), and to represent investment-grade sterling corporate bonds, iShares £ Corporate Bond ex-Financial ETF (ISXF) (in blue).

    That is only over 5 years, not 10.
    But the "strategic" funds both look pretty poor in this comparison. In most years, they are beaten by both the gilts tracker and the corporate bonds tracker.
    If you count a difference of less than 1% as a tie, then Jupiter beat gilts once, and lost twice, with 2 ties.
    PIMCO never beat gilts, and lost 4 times, with 1 tie.
    Neither Jupiter nor PIMCO ever beat corporate bonds. Jupiter lost twice, with 3 ties. PIMCO lost 4 times, with 1 tie.
    The past 10 years have seen the largest capital growth in bonds ever.  Bonds were not intended to provide capital growth and this is making them less suitable for the purposes for which private investors need them. ie steady and consistent growth from reinvestment of interest uncorrelated with equity. To judge a bond fund on high capital growth is missing the point - if you want that go for equities.

    Under current circumstances in particular I believe we need flexibility in our use of bonds.  Bond management is a mathematical exercise as unlike shares the costs,total returns and dates when those returns are received are fixed and known from the outset.  We as private investors would not normally have the knowledge or the tools to carry out the calculations.  So I am happy to leave the problem of bond selection to a manager.
     
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