Global Government Bond I aims to generate income and increase the amount invested by investing in a globally diversified portfolio of government bonds and currencies. The Fund generally will acquire positions in debt securities, such as fixed and floating rate bonds, inflation-indexed bonds, zero-coupon bonds, discount bonds, eurobonds, global bonds and yankee bonds, and in currencies of countries that are rated Investment Grade.
The fund returned -1.15% (gross of fees) over the month, underperforming the benchmark which returned -0.29%. Bond selection detracted -0.48% from relative returns and currency selection detracted -0.38%. The top three bond detractors from relative returns were the overweight positions in Mexico and Colombia and the underweight position in Europe. The top three currency detractors from relative returns were the short positions in United States Dollars and Euro and the long position in Norwegian Krone.
The past month has offered hope for continued declines in inflation and a possible “soft landing” for the global economy but bond yields generally increased over the month. As a consequence the FTSE World Government Bond index experienced a modest negative return for the month of -0.2% in US dollar hedged terms. In unhedged terms the index was down -1.4% as the US dollar performed well against most major currencies.
In the US, annual headline inflation actually increased slightly to 3.2% in August, up from 3.0% the previous month. There was better news from the core inflation reading however, which fell to 4.7%, continuing its downward trend. The unemployment rate increased to 3.8% this month from 3.5% the previous month. This rise was largely driven by people returning to the workforce and the participation rate rose to the highest rate since the Covid pandemic began in early 2020. Meanwhile at the Jackson Hole meeting of central bankers the mood was generally one of caution and expectations of a “higher for longer” interest rate environment. Against this backdrop US treasuries returned -0.5% over the month.
Eurozone headline inflation fell to 5.3% down from the previous month’s reading of 5.5%, although the outlook for inflation in the region is clouded by rising energy prices and especially natural gas prices. Unemployment across the region stayed at 6.4% for the fourth successive month as labour markets remain robust. The bond market in Germany returned 0.3%, as did the Spanish bond market, whilst the Austrian market returned 0.5%. The ECB did not hold a policy meeting in August, so attention focused on the Bank of England, which did increase its interest rate by 0.25% to 5.25% adding further to the housing market woes as mortgage rates continue to rise. UK house prices fell at the fastest annual pace since 2009 in August according to the mortgage provider Nationwide. UK bonds returned -0.6% over the month.
Asian bonds markets also struggled over the month. Japanese inflation was reported at 3.3% in the year to July and the government bond market returned – 1.3% as speculation continues around whether the central bank will end their yield curve control policy in the near future. Colchester maintains its underweight in Japan as it does in China where bonds rallied over the month by 0.6% with the central bank cutting the Loan Prime Rate to 3.45%. The country continues to struggle with weak growth, over-levered property developers, and inflation has now turned negative with the July figure standing at -0.3%.
The New Zealand bond market also sold off, returning -0.7% over the month. The job market in the country remains tight putting upward pressure on wages, this is despite near record levels of migration to the country. Throughout the Covid pandemic, the country tightly restricted inward movement and net migration turned negative, but this has now turned around drastically over the past twelve months. In Australia the bond market enjoyed better performance, gaining 0.6% in August, with pay rises in the country staying relatively constrained compared to other developed market peers.
What is Colchester Global Government Bond I Colchester Global Government Bond I is an Managed Funds investment product that is benchmarked against Global Aggregate Hdg Index and sits inside the Fixed Income - Bonds - Global Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The Colchester Global Government Bond I has Assets Under Management of 642.97 M with a management fee of 0.64%, a performance fee of 0.00% and a buy/sell spread fee of 0%.
How has the investment product performed recently?
The recent investment performance of the investment product shows that the Colchester Global Government Bond I has returned 1.23% in the last month. The previous three years have returned -1.42% annualised and 4.39% each year since inception, which is when the Colchester Global Government Bond I first started.
How is risk measured in this investment product?
There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since Colchester Global Government Bond I first started, the Sharpe ratio is NA with an annualised volatility of 4.39%. The maximum drawdown of the investment product in the last 12 months is -3.43% and -14.74% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.
What is the relative performance of the investment product?
Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The Colchester Global Government Bond I has a 12-month excess return when compared to the Fixed Income - Bonds - Global Index of 0.09% and -0.05% since inception.
Does the investment product produce Alpha over its Peers?
Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. Colchester Global Government Bond I has produced Alpha over the Fixed Income - Bonds - Global Index of NA% in the last 12 months and NA% since inception.
What are similar investment products?
For a full list of investment products in the Fixed Income - Bonds - Global Index category, you can click here for the Peer Investment Report.
What level of diversification will Colchester Global Government Bond I provide?
Colchester Global Government Bond I has a correlation coefficient of 0.96 and a beta of 1.24 when compared to the Fixed Income - Bonds - Global Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.
How do I compare the investment product with its peers?
For a full quantitative report on Colchester Global Government Bond I and its peer investments, you can click here for the Peer Investment Report.
How do I compare the Colchester Global Government Bond I with the Global Aggregate Hdg Index?
For a full quantitative report on Colchester Global Government Bond I compared to the Global Aggregate Hdg Index, you can click here.
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To sort and compare the Colchester Global Government Bond I financial metrics, please refer to the table above.
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Comments from SMSF Mates
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Performance Commentary - July 31, 2023 The fund returned 0.22% (gross of fees) over the month, outperforming the benchmark which returned -0.40%. Bond selection added 0.10% to relative returns and currency selection added 0.52%. The top three positive bond contributors to relative returns were the underweight positions in Japan and United States and the overweight position in Singapore. The top three positive currency contributors to relative returns were the long positions in Norwegian Krone, Colombian Peso and Swedish Krona.
Major central banks in the US and Europe continued their rate hiking cycle in July as core inflation remains persistent. Despite monetary policy tightening however, recent economic data have been encouraging and point to substantial resilience across many global economies. July was largely a positive month for risk assets though government bond performance was marginally negative as yields moved higher. The FTSE World Government Bond Index returned -0.3% in US dollar hedged terms whilst the unhedged return for the index fared a little better at positive 0.3% given the weakening of the US dollar.
In the US, annual headline inflation fell to 3.0% in June providing further support to the growing acceptance that inflation pressures may be abating. The Federal Reserve elected to remain cautious however and resumed its tightening after a pause in June, lifting the target range for the policy rate by 25bps to 5.25%- 5.50%. The decision was affirmed by subsequent better-than-expected economic data, with second quarter GDP growth coming in at an annualised pace of +2.4% (vs. +1.8% expected). Consumer spending slowed a touch after its strong start to the year, but this was more than made up for by investment spending. The US bond market returned -0.3% and the Colchester global bond programme remains underweight the US bond market.
In the euro area, the ECB likewise increased their policy rate by 25bps in July bringing the deposit rate to 3.75%. Eurozone inflation continued its downtrend reaching 5.3% in July, however core inflation remained unchanged at 5.5%. Speaking at a press conference, ECB president Lagarde, said the euro area’s nearterm economic outlook had “deteriorated, owing largely to weaker domestic demand”. The region’s economy grew 0.3% in Q2 with high inflation and tighter financing condition dampening spending. Returns across eurozone bond markets were muted for July, averaging -0.2%.
Performance Commentary - May 31, 2023 The fund returned -0.11% over the month, outperforming the benchmark which returned -0.59%. Bond selection added 0.46% to relative returns and currency selection added 0.02%. The top three positive bond contributors to relative returns were the overweight positions in Colombia and Indonesia and the underweight position in United States. The top three positive currency contributors to relative returns were the long positions in Colombian Peso and Mexican Peso and the short position in Euro.
The month of May continued to be dominated by the ongoing US debt ceiling negotiations as we approached the critical deadline when the US would “run out of money” and financial markets fearing the possibility of a technical default. Meanwhile global headline inflation continues to fall but ‘sticky’ core inflation remains a concern to policymakers globally as both the Federal Reserve and the ECB raised policy rates this month. Against this backdrop, the FTSE World Government Bond Index returned negative 0.4% in US dollar hedged terms whilst the unhedged return for the index fared worse at -2.2% over the month given the strengthening of the US dollar. In the US, the political stand-off between the White House and Republicans in Congress came to an end when the Senate approved the deal to lift the debt ceiling until after the 2024 presidential election.
Whilst this allayed fears that the US was on the brink of an unprecedented default, Fitch took the decision to keep the US credit rating on negative watch. On a positive note, US inflation continued its downtrend reaching 4.9% in April. The US bond market returned a negative 1.2% in May and the Colchester global bond programme remains underweight the US bond market. Eurozone inflation had fallen to its lowest level since the beginning of the war in Ukraine, to 6.1% in May, down from 7% in April. Despite this, the European Central Bank’s views on core inflation continue to be that “the latest developments were broadly seen as worrisome” and hence has signalled more interest rate rises lie ahead to bring inflation down to its target level.
Not withstanding this, eurozone bond markets performed positively in May, averaging a return of 0.6% over the month. Elsewhere in Europe, the UK was amongst the worst performing bond markets over the month with a negative return of 4.1%. This comes despite inflation falling further to 8.7% in April from 10.1% in the previous month. However, with food inflation remaining elevated at 19% there are increasing concerns that the Bank of England would need to tighten monetary policy for longer than expected.
Performance Commentary - December 31, 2022 The fund returned -1.01% (gross of fees) over the month, outperforming the benchmark which returned -2.19%. Bond selection added 1.05% to relative returns and currency selection added 0.13%. The top three positive bond contributors to relative returns were the underweight positions in Europe, United States and Japan. The top three positive currency contributors to relative returns were the long positions in Japanese Yen and Korean Won and the short position in United States Dollars. 2022 was a tumultuous year for financial markets as rampant inflation hit multidecade highs across the globe. This backdrop forced central banks into aggressive tightening of monetary policy, paving the way for negative returns in both equities and sovereign bonds. The FTSE World Government Bond Index returned -12.9% over the year in US dollar-hedged terms, whilst the USD unhedged version of the index returned -18.3%, as US dollar strength persisted for much of the year before reversing in the last quarter. This reversal in the past three months fuelled a positive return to round out the year, with the WGBI returning 3.8% in USD unhedged terms. In the US, headline inflation continued its downtrend, falling from 7.7% in October to 7.1% in November. Subsequently, the Federal Reserve reduced the pace of policy tightening from 75bps to 50bps in December, whilst maintaining that further hikes were warranted in 2023. The Treasury market returned -0.7% over the month, bringing the annual return to -12.6%. The Colchester global bond programme remains underweight US Treasuries although exposure has been increased as yields backed up this year. Returns from Canadian bonds were similar, posting -1.5% over the month and ending the year at -10.3%. As Mexico’s inflation continued to show signs of slowing down from its peak of 8.7% in August, Banxico followed regional peers and raised interest rates by 50bps to 10.5%. Mexico’s bond market returned 1.6% over the month, finishing the year with a positive return of 1%. We continue to hold a significant overweight to Mexican government bonds on account of the relatively attractive valuation and robust monetary policy framework.
Performance Commentary - November 30, 2022 The fund returned 2.74% (gross of fees) over the month, outperforming the benchmark which returned 1.98%. Bond selection added 0.59% to relative returns and currency selection added 0.18%. The top three positive bond contributors to relative returns were the overweight positions in Mexico, Indonesia and Poland.
The top three positive currency contributors to relative returns were the long positions in Japanese Yen and Korean Won and the short position in United States Dollars. The performance of global bond markets was generally positive in November as investor sentiment continued to improve following a lower inflation print in the US, with market participants viewing this as a strong signal that the Fed will slow the pace of rate hikes. The FTSE World Government Bond Index returned 2.1% in US dollar-hedged terms, whilst the unhedged version of the index returned 4.5% as the US dollar weakened and erased some of its gains from earlier in the year.
In the US, the Federal Reserve once again raised its target range for the policy rate by 75bps in November. The target is now 3.75%-4.00%, although Chair Powell signalled that the Fed will likely slow the pace of rate rises with a “downshift” to a 0.5% increase at the next meeting. He did warn however that the US central bank has a long way to go in its fight against inflation and the Fed would act accordingly until price pressures have slowed to a level more in line with the 2% target. Encouragingly, headline inflation reduced from 8.2% the previous month to 7.7% in October, continuing the downward trend for the second half of 2022.
The Treasury market returned 2.6% over the month as yields declined. The Colchester global bond programme remains underweight US Treasuries. Elsewhere, returns in Canada were similar, posting 2.4% over the month as we remain broadly flat the market relative to the index. Mexico’s bond market was up 3.5% on the month as Banxico followed regional peers and raised interest rates to 10%. We continue to hold a significant overweight to Mexican government bonds on account of the relatively attractive valuation. In Colombia, the central bank hiked rates to 11%, whilst the new President’s fiscal reform was approved. The local Colombian government bond market rallied 4.5%.
Performance Commentary - October 31, 2022 The fund returned -0.16% over the month, outperforming the benchmark which returned -0.39%. Bond selection added 0.19% to relative returns and currency selection added 0.04%. The top three positive bond contributors to relative returns were the underweight positions in United States and United Kingdom and the overweight position in Singapore. The top three positive currency contributors to relative returns were the long positions in Norwegian Krone and British Pound and the short position in Swiss Franc. Investor sentiment improved somewhat in October, fuelling a rally in risk assets with the markets beginning to debate whether or not the pace of monetary tightening from global central banks may be slowing. Inflation remains a key concern and US CPI declined slightly in September to 8.2%. Meanwhile in Europe, although inflation pushed higher, unseasonably warm weather has allowed gas reserves to remain high and put downward pressure on wholesale gas prices which had been extremely elevated.
Meanwhile, the political angst in the UK has also abated with the installation of a new Prime Minister providing some respite to markets. Global government bonds experienced mixed fortunes in October with the FTSE World Government Bond Index returning -0.4% in US dollar hedged terms. The unhedged version of the index performed similarly, at -0.5%. Despite a dearth of economic data in the US in October, Treasury yields continued to push higher, with the 10-year Treasury yield pushing through 4% for the first time since before the global financial crisis in 2008. The return of the US bond market was -1.4% underperforming most of the other major markets. Our prospective real yield valuation has risen with the rise in nominal yields, and is now well into positive territory at around 1.0%, meaningfully above cyclical lows of -1.5%. The Global Bond programme has held an active underweight to the US market for some time, but we have reduced the scale of this underweight exposure somewhat in response to shifting valuations.
Meanwhile, over the borders in both Mexico and Canada, local bond markets fared better, returning – 0.1% and -0.9% respectfully. Eurozone bond markets experienced a varied month of performance, despite the European Central Bank increasing their main monetary policy rate by 0.75% to 2.0%. German bonds returned -0.6% in October, France performed better with a return of 0.1%, with the outperformer in the Eurozone being Italy. The Italian market recovered from its pre-election weakness to rally 1.0% over the month. The Colchester Global Bond programme remains substantially underweight the region, given the continued low real yields compared to alternatives in other nonEuropean markets. The installation of yet another Prime Minister in the UK met a broadly favourable response from financial markets, following the calamitous effort to reduce taxes under the previous leadership. The new PM, Rishi Sunak, is a former Chancellor of the Exchequer and generally considered to be a safer pair of hands as regards economic policy. The UK gilt market swiftly recovered and returned 3.3% on the month
Performance Commentary - September 30, 2022 The fund returned -3.16% over the month, outperforming the benchmark which returned -3.41%. Bond selection added 0.50% to relative returns, while currency selection detracted -0.24%.
The top three positive bond contributors to relative returns were the underweight positions in United States, Europe and United Kingdom. The top three currency detractors from relative returns were the short positions in United States Dollars, Swiss Franc and Euro.
The third quarter has been characterised by the ongoing tightening of monetary policy by major central banks in response to elevated levels of inflation. This backdrop translated into volatility across financial markets, with both global equities and global bonds declining. As yields moved higher, the FTSE World Government Bond Index returned -3.1% in September and -3.8% over the quarter in US dollar hedged terms. The US dollar continued its upward trajectory this quarter, leading to a more negative unhedged index return of -7.6%. Much of this selloff occurred in September where the unhedged index declined -5.1%. In the US, the Federal Reserve raised its target rate by another 75bps in its September meeting. This brings the cumulative year to date increase to a substantial 3% and in delivering its policy decision, the Fed also signalled that more rate hikes will be needed to lower inflation to target.
The rate of inflation has fallen slightly for the second consecutive month to 8.3% in August from 8.5% the previous month. However, this was somewhat higher than expected and continued to put upward pressure on bond yields. The Treasury market fell -3.4% during September and posted -4.5% for the quarter. The Colchester global bond programme remains underweight in US Treasuries relative to other markets in the opportunity set, although real yield valuations in the US have improved somewhat.
Performance Commentary - August 31, 2022 The fund returned -2.55% over the month, outperforming the benchmark which returned -3.11%. Bond selection added 0.79% to relative returns, while currency selection detracted -0.24%. The top three positive bond contributors to relative returns were the underweight positions in United States, Europe and United Kingdom. The top three currency detractors from relative returns were the long positions in Japanese Yen and Swedish Krona and the short position in United States Dollars.
August was a difficult month for global bonds as renewed investor concerns over higher inflation led to a selloff in markets. Concerns were particularly elevated in Europe where the threat of Russian gas supplies being cut off before the winter resulted in significant energy price rises in the region. The risk is that this will push the already high inflation in the region well into double digits, whilst also crimping economic activity. The FTSE World Government Bond Index returned – 3.0% over the month in US dollar hedged terms and the unhedged return was – 4.4% as the US dollar continued to strengthen against most of the currencies in the benchmark. In the United States the annual meeting of central bankers at Jackson Hole drew investor attention.
Federal Reserve Chairman Jerome Powell gave a short, but rather bleak, speech at the event outlining the Fed’s conviction in lowering inflation. He explained that the effort to reduce inflation will probably “require a sustained period of below-trend growth,” and that it will “bring some pain to households and businesses.” Having said, that there was some positive news for US policymakers, as inflation declined to 8.5% in August from 9.1% the month before. Against this backdrop the US bond market fell by -2.5% over the month.
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