An asset class where we see this opportunity in this environment is global government bonds.
The case for going global
Recent years have seen a dramatic shift in the global macroeconomic landscape. Central banks moved from ultra-accommodative policies following the Global Financial Crisis in 2008, to aggressive tightening in response to inflationary pressures exacerbated by the Covid pandemic in 2020 and ongoing geopolitical tensions. This has created a complex environment for bond investors, where traditional strategies may fall short.
After decades of trying to grow and boost inflation, central banks were suddenly on the back foot and saw prices balloon and lost control of consumer spending. This sent bond yields higher and valuations lower, as central banks eventually came round to the realisation that this bout of inflation was not transitory and monetary conditions had to be tightened to prevent further escalation.
Today's environment is defined by sticky inflation, diverging central bank paths, frequent policy pivots, and geopolitical shocks. In this landscape, investing in single-country government bond funds can limit the opportunities for investors, notably relying on getting the interest rate call right. A global approach, by contrast, opens up a broader opportunity set — across yield curves, regions, and relative value trades — reducing reliance on any one market or macro view.
Multiple levers for alpha
Reminding ourselves of the backdrop is important, as it sets the scene for what we are experiencing in current global macro financial markets. For bond investors, the lesson to take away from this period of heightened volatility, and various pivots in central bank policies, is the enhanced opportunities for the nimble active manager.
For bond investors, the lesson to take away from this period of heightened volatility, and various pivots in central bank policies, is the enhanced opportunities for the nimble active manager.
Our active management approach allows us to rotate across sovereign markets to capture relative value, adjust duration dynamically to manage risk and seize opportunity, and exploit cross-market inefficiencies created by diverging fiscal and monetary policies. This flexibility means we're not pinned to the fate of a single central bank or economy.
Having the ability to tactically differentiate exposures across global markets can result in the fund having lower interest rate sensitivity. We believe this has become more important than ever in times of increased volatility, sticky inflation and volatile interest rates.
Diversification that works harder
A global benchmark typically carries a shorter duration than, say, the UK gilt market — offering a more balanced interest rate exposure. For example, a global benchmark may have a duration of around 6.5 years, compared to 7.6 years for UK gilts. This helps reduce volatility and enhances the fund's ability to generate consistent alpha, even in turbulent markets.
Generally, we believe that the more diverse a portfolio, the better its ability to navigate duration effects, as it is not exposed to the behaviour and trends of a single market. This gives an active manager the opportunity to take advantage of discrepancies and inefficiencies on a tactical basis to add alpha to the portfolio.
For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change. Forward looking statements are subject to certain risks and uncertainties, Actual outcomes may be materially different from those expressed or implied.
