- Policy announcements by major central banks, OPEC’s decision to cut oil production, and generally positive global economic data were the main highlights of the month
- The European Central Bank kept rates unchanged and maintained its asset purchase program, and it suggested that only a substantial change in the economic outlook would justify more stimulus. The Bank of Japan moved towards targeting a 0% 10-year Japanese government bond yield. Most other major central banks left policy rates unchanged.
- Most global sovereign yield curves steepened, the US dollar (USD) fell versus most currencies, and corporate spreads widened
Fiscal Stimulus Scenarios: Clinton Versus Trump
US – Cyclically adjusted budget deficit (annual change, % of GDP*)
Source: CBO, Wellington Management
*Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
- World Bond Fund returns were neutral over the course of the month as positive performance from core currency (FX) was offset by global government core rates and our opportunistic sources of returns
- In global government core exposure, FX contributed to performance while rates detracted over the course of the month. In core currency exposure, our exposure to the Norwegian Krone benefitted the portfolio as the Federal Reserve’s decision to hold rates stable in September caused higher beta1, commodity linked currencies to rally.
- Allocations to high yield and securitized credit drove the majority of results in the opportunistic space for the month of September as credit spreads continued to tighten
- Our core rate exposure detracted as the portfolio was most negatively impacted by rate increases in Mexico, Australia, and Norway
- Macro-driven duration2 strategies detracted. Our overweight duration positions in the intermediate and long ends of the US and UK curves were the primary detractors as yield curves steepened due to increased speculation about tapering in global central bank liquidity.
- Macro-driven currency strategies were negative with an underweight euro position being the primary detractor. Most currencies, including the euro, appreciated after the Federal Reserve lowered long-term US rate-hike projections despite signaling a December hike.
Expenses4 % (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 was decreased to 1.08 years primarily through an increase in active short positions. We remain bearish on duration broadly as valuations on government bonds continue to look rich. Some central banks are acknowledging the limits of monetary policy and the emphasis is shifting toward fiscal stimulus. We remain bullish on the USD broadly and are currently fully hedged.
- There is increasing discussion about the limitations of monetary policy and a shift toward fiscal levers (government spending). We are tactically underweight duration in the US, UK, and Japan.
- Although global economic growth is improving moderately, political developments remain a key downside risk. We remain overweight the USD versus major European and Asia Pacific currencies.
- Commodity price stabilization and an improving cycle in Asia should benefit select higher-beta and oil-linked currencies. We favor exposure to the Norwegian krone and the Australian dollar.
Currency Exposure (%)
|As of 9/30/16||Fund||Benchmark3|
|New Zealand Dollar||-2.06||0.00|
|Hong Kong Dollar||-2.15||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 Beta is a measure of risk that indicates the price sensitivity of a security or a portfolio relative to a specified market index.
2 Duration is a measure of the sensitivity of an asset or portfolio’s price to nominal interest rate movement.
3 Benchmark is the Citigroup World Government Bond Index.
4 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.
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.