- Global rates stabilized during the month, driving a recovery in most fixed income sectors
- Positive economic news, higher oil prices and some signs of likely global policy tightening in 2017 marked the close of a rollercoaster year
- Global government bond yields were mixed, the US dollar (USD) appreciated versus most currencies and corporate spreads tightened
US inflation expectations have spiked following Trump's electionMarket-based measure of US inflation expectations (%)
Sources: Bloomberg, Wellington Management
- Macro-driven currency strategies were beneficial. Our overweight to the USD, particularly versus the euro, the British pound and the New Zealand dollar, was the primary contributor. The USD index hit new 14-year highs and rallied against most major currencies after the US Federal Reserve (Fed) increased its policy rate for only the second time in eight years and shifted its rate expectations higher for 2017.
- Our allocation to credit sectors, led largely by High Yield, was beneficial as spreads tightened amidst a continued risk rally over the course of the month.
- World Bond returns were slightly negative over the course of the month as global government core exposure detracted while opportunistic strategies were positive
- In global government core exposure, our bond holdings detracted as interest rates were relatively mixed as European rates moved lower in general while Dollar Bloc interest rates continued their increase. Core currency (FX) was neutral over the course of the month due to the high USD hedge ratio implemented in the portfolio.
- Macro-driven duration1 strategies detracted. Our overweight duration positions in the front end of the Australian, Canadian and New Zealand curves underperformed as short-term yields increased in the US and the commodity-linked dollar bloc while declining in Europe and Japan.
Expenses3 % (Class A) Net Op. Exp.: 1.05% Gross Op. Exp.: 1.08%
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of the investment will fluctuate so that investors' shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For more current performance information to the most recent month-ended, click here.
Portfolio Positioning & Market Outlook
- Portfolio duration decreased slightly over the course of the month now standing at 1.53 years largely due to an increase in active short positions. We remain bearish on duration broadly as valuations on government bonds continue to look rich in spite of the recent selloff in rates. We remain bullish on the USD broadly and were once again fully hedged at month end as we expect longer term USD strength in expectation of further US fiscal policy and impending rate hikes from the Fed.
- Global activity indicators and inflation expectations are edging higher. We are underweight duration in UK and Japan.
- We think that markets are overly optimistic about early policy normalization in select commodity-linked economies. We are underweight New Zealand and Australian dollar and we hold overweight duration positions in the front-end of Australia, Canada and New Zealand.
- The Fed’s policy outlook is diverging further from other major central banks. We are overweight USD versus the euro and the British pound.
Currency Exposure (%)
|As of 12/31/16||Fund||Benchmark4|
|New Zealand Dollar||-1.26||0.00|
|Hong Kong Dollar||-2.13||0.00|
A Word About Risk
All investments are subject to risk, including the possible loss of principal. There is no guarantee the Fund will achieve its stated objective. The Fund’s share price may fluctuate due to market risk and/or security selections that may underperform the market or relevant benchmarks. Fixed Income risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall; these risks are currently heightened due to the historically low interest rate environment. Obligations of U.S. Government agencies are supported by varying degrees of credit but are generally not backed by the full faith and credit of the U.S. Government. Investments in high-yield (“junk”) bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Mortgage- and asset-backed securities’ risks include credit, interest-rate, prepayment, and extension risk. Derivatives may be riskier or more volatile than other types of investments because they are generally more sensitive to changes in market or economic conditions; risks include currency, leverage, liquidity, index, pricing, and counterparty risk. Foreign investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as political and economic developments in foreign countries and regions. These risks are generally greater for investments in emerging markets. The Fund may have high portfolio turnover, which could increase the Fund’s transaction costs and an investor’s tax liability. The Fund is non-diversified, so it may be more exposed to the risks associated with individual issuers than a diversified fund. Privately placed, restricted (Rule 144A) securities may be more difficult to sell and value than publicly traded securities, thus they may be potentially illiquid.
1 Duration is a measure of the sensitivity of an asset or portfolio’s price to nominal interest rate movement.
2 The Group of Ten (G10) is made up of eleven industrial countries: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.
3 Expense ratios are as shown in the most recent prospectus. Net expenses reflect contractual expense reimbursements in instances when these reductions reduce the fund’s gross expenses. Contractual reimbursements remain in effect until February 28, 2017 and automatically renew for one-year terms unless terminated.
4 Benchmark is the Citigroup World Government Bond Index.
Citigroup World Government Bond Index is a market-capitalization weighted index consisting of government bond markets. Country eligibility is determined based on market capitalization and investability criteria. All issues have a remaining maturity of at least one year.
Barclays U.S. Aggregate Bond Index is composed of securities from the Barclays Government/Credit Bond Index, Mortgage-Backed Securities Index, Asset-Backed Securities Index, and Commercial Mortgage-Backed Securities Index.
Indices are unmanaged and not available for direct investment.