Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

IN June the Bank of England raised interest rates by a larger than expected 0.5%, making it the 13th consecutive increase as it tries to bring inflation back to the 2% target. The Bank rate has now reached 5% and is expected to go up to around 6% early next year, a move that would normally be harmful to the economy and detrimental for risk assets.1

With such an unpromising macro-economic backdrop, it could be a good time to look at a defensive option like the Colchester Global Bond Fund, a member of the Select 50 that invests in sovereign bonds from around the world. These types of holdings typically have a low correlation to growth assets such as equities and other fixed income securities, thereby providing valuable diversification during difficult periods.

Colchester Global Investors is a specialist fixed income manager and although the name is not all that well-known, it benefits from having a well-established and stable investment team. Their global bond fund aims to achieve favourable income and capital returns, with the associated objective of preserving and enhancing investors’ capital.

It is an interesting portfolio that is actively managed against the FTSE World Government Bond benchmark. According to the latest available data, the fund is more than 10% underweight in key markets like the US, Europe and Japan, with correspondingly large overweight positions in Mexico and Singapore. This is due to their strategy of seeking out the highest real yields.

The currency positioning is also significant with the portfolio more than 20% underweight in the Euro and US dollar, in favour of the Norwegian Krone, Japanese Yen and Swedish Krona. As a result of these decisions the fund has a more attractive yield to maturity of 4.56% than the benchmark and a lower modified duration, making it less sensitive to higher interest rates.2

Colchester Global Bond was launched in June 2019 and since the end of 2020 has struggled as interest rates around the world have risen. Investing in the most defensive area of the fixed income market has enabled it to be more resilient than most, although it has still made a small annualised loss of 2.3%3 since inception, which is almost 1% better than the benchmark.

If interest rate expectations are nearing their peak and the developed economies head towards recession, then government bonds should be well-placed to deliver positive total returns. It is also worth noting that the distribution shares pay a modest yield of 2.42%4 which may appeal to income seekers and is not guaranteed.

Source:

1 BBC, 22.6.23

2,3 Colchester Global Investors, 31 May 2023

4 Fidelity International, 11 July 2023
 

Five-year performance table

(%) As at 30 June

2018-2019 2019-2020 2020-2021 2021-2022 2022-2023
Colchester Global Bond Fund - 6.6 -6.9 -5.5 -4.8

Past performance is not a reliable indicator of future returns

Source: Morningstar, as at 30.6.23. Basis: bid-bid, income reinvested in GBP. The fund’s primary share class according to the IA is shown. Excludes initial charge.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. The Colchester Global Bond Fund invests in overseas markets and so the value of investments could be affected by changes in currency exchange rates. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. The fund uses financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The fund invests in emerging markets which can be more volatile than other more developed markets. The Key Information Document (KID) for Fidelity and non-Fidelity funds is available in English and can be obtained from our website at www.fidelity.co.uk. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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