“2022 was a challenging year for fixed-income (bond) funds, as rising inflation necessitated central bank action in the form of interest rate rises. The result was increased uncertainty and a significant drop in the price of many fixed-income assets.
Whilst we expect volatility to remain elevated from here, and caution is required, we also expect there to be opportunities for investors able to harvest the volatility and we feel it is prudent to increase exposure to assets that can benefit from the higher interest rate regime.
During the current Q2 fund changes we have increased the JPM Global Bond Opportunities holdings across the majority of our Core and Income MPS portfolios, increasing by as much as 3% in Core Portfolio 1 to a total weighting of 4%. This change improves the geographical reach and the opportunity set of our existing fixed-income holdings.
To provide you with a greater insight into the JPM Global Bond Opportunities fund and to discover in more detail where the current opportunities are being found for investors, we asked their management team to write this month’s guest blog.”
– Chris Rush, IBOSS Investment Manager
JPM Global Bond Opportunities
The JPM Global Bond Opportunities Fund, which is managed by J.P. Morgan Asset Management’s Global CIO of Fixed Income, Bob Michele, and International CIO of Fixed Income, Iain Stealey, actively invests across the entire global fixed income universe. It focuses on investing in only the team’s highest conviction “best ideas” without any rigid constraints to region or sector, whilst the dynamic nature of the fund allows it to tactically shift its allocation to capitalise on current market opportunities.
The fund is well-positioned to benefit from the conducive market environment for bonds this year. Especially when looked at from a global lens, both income and diversification have returned to fixed income markets. The massive repricing of yields and the return of right-way (inverse) correlation with equities have made fixed income attractive again to multi-asset investors. Recession is our base case scenario, and as such we are favouring high quality duration in both corporate and government bond markets.
Investment Grade Exposure
The fund’s investment grade exposure is at the higher end of its historical range, as we have been rotating up in quality over the last several months. Within the investment grade space, spreads offer more value in Europe than the US (Europe spreads are tracking in the 70th percentile vs. historical levels, whereas US spreads are less than the 60th percentile vs. history). As recession looms and central banks near the peak of their hiking cycles, we have been adding government duration to the fund on any back-up in yields. Our preference is for US Treasuries, given inflation is trending down, the Federal Reserve is likely done hiking and potential banking stress is more relevant in that region; we are also finding tactical opportunities in other markets, such as UK Gilts, where valuations look attractive.
Emerging Markets
We are also constructive on select emerging market local bonds. Emerging market central banks were early to hiking rates – because of which they are nearing the end of their hiking cycles and are offering attractive real yields (yields in excess of inflation). On the inflation front, emerging markets are past the peak and the difference in emerging versus developed market growth has been accelerating in favour of the former.
High Yield Credit
While we are cautious on high yield credit at the moment, we think this sector could pose a potential opportunity for investors later in the year. The overall health of these companies has improved over the past couple years, and defaults are expected to be below levels reached in past recessions as most companies do not face immediate refinancing needs. That said, current spreads of approximately 500 basis points aren’t lucrative enough to compensate for the deteriorating macroeconomic backdrop and potential rise in defaults. Instead, we would need to see spreads widen before adding exposure to this sector.
Japan
Another market to keep an eye out for this year is Japanese government bonds. Despite historically high levels of inflation, the Bank of Japan continues with its approach to keep rates artificially low by intervening in fixed income markets through yield curve control. The fund is short Japanese duration as we don’t think the central bank’s policy is sustainable and we expect them to take a hawkish turn eventually, resulting in a rise in yields.
A Compelling Outlook
The outlook for bonds is the most compelling it’s been in over a decade – though there are still risks on the horizon. Central banks have hiked aggressively, which should result in cracks in the economy, as recently witnessed with the US regional banking turmoil. Conversely, if central banks pause or begin cutting rates too soon, inflation could remain elevated and pose ongoing challenges to the consumer. In this uncertain environment, we believe a flexible, global bond approach like the JPM Global Bond Opportunities Fund is crucial: it provides investors with access to the attractive market opportunities whilst dynamically managing exposures amidst the volatility.
– Marika Dysenchuk and Shagun Aggarwal, Investment Specialists for the JPMorgan Global Fixed Income Team
Investment objective: To provide income and capital growth over the long-term (5-10 years) by investing opportunistically in an unconstrained global portfolio of debt securities and currencies, using derivatives as appropriate. Please refer to the prospectus, KIID and SID before making any final investment decisions.
This communication is designed for informational purposes only and is not intended as investment advice. These investments are not suitable for everyone, and you should obtain expert advice from a professional financial adviser. Please note that the content is based on the author’s opinion at the time of writing/publish date. Our views and opinions regarding certain investment themes and topics can alter over time as the macroeconomic background changes and other industry news is made publicly available, this is not intended as investment advice.
Past performance is not a reliable indicator of future performance. The value of investments and the income derived from them can fall as well as rise, and investors may get back less than they invested.
IBOSS Asset Management is authorised and regulated by the Financial Conduct Authority. Financial Services Register Number 697866.
Registered Office: 2 Sceptre House, Hornbeam Square North, Harrogate, HG2 8PB. Registered in England No: 6427223.
IAM 158.5.23
