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.

When someone mentions government bonds, images of gilts, US Treasury notes and perhaps German bunds are likely to spring to mind. Commonly stable, reliable, and perhaps a bit predictable.

It’s easy to forget that ‘government debt’ is a global marketplace, one which presents a diverse range of opportunities that extends far beyond our immediate associations.

It’s by seeking to capture the hidden value of smaller, high quality government bonds and currencies that Cian O’Brien, Senior Investment Officer of the Colchester Global Bond Fund, believes his fund offers ‘a pretty unique investment process.’

Under the GBP unhedged share class which was released in 2019 (The Colchester Global Bond Fund was launched in 2012), the fund has become one of our experts’ Select 50 choice of favourite investments. Its managers, Ian Sims and Keith Lloyd, pin their medium to long term strategy on two key tenets: a value driven process, and an exclusive focus on sovereign bonds and currencies.

My colleague, Daniel Lane, caught up with O’Brien recently to discuss the fund’s strategy and his outlook for the coming months.

Government bonds and currencies

As O’Brien explains, investing exclusively in sovereign debt, with no space given to corporate bonds or derivatives (besides currency forwards), is fairly unique for bond funds. Coupling this with a bias for investment grade debt - bonds with a high credit rating - puts the fund in a good position to provide a reliable income stream.

But while high-quality holdings form the bulk of the fund’s portfolio, generating meaningful return is also central to the managers’ objectives. Sims and Lloyd have both the willingness and the ability to take sizable positions in smaller markets where they believe lies the greatest value.

For this reason, O’Brien feels the fund offers ‘all the benefits of government bonds, and an additional return which we believe we can obtain through this medium to long term, value-based approach’.

Diversification is also a key component of the managers’ process. Theirs is a large portfolio, currently comprising around 165 holdings dispersed across the globe, with its top 10 positions counting for around 30% of total assets.

And it’s not just diversification across the fund’s portfolio which may appeal to investors. O’Brien suggests the key characteristics of government debt - high liquidity and a negative correlation to risk assets - could suit those looking to diversify their own portfolios.

Value driven process

This fund’s process focusses on uncovering hidden value across the government bonds space. And, O’Brien argues, there’s plenty of value out there. This is a broad marketplace, where smaller governments like Singapore’s offer high quality debt which is consistently overlooked by the wider market.

When asked about how the onset of the COVID crisis may have changed the managers’ strategy, O’Brien explains how volatility and consequent sell-offs actually reinforce their value-seeking approach.

With investors piling into the ‘safe havens’ of US markets and currencies, O’Brien describes how the US dollar has become one of the most overvalued currencies, prompting the managers to reduce their exposure across the pond and look to currencies that suffered amid the volatility but whose fundamentals remain strong.

O’Brien feels that currencies like the Norwegian krone, which depreciated around 20% relative to the US dollar in the first two weeks of March, present a good value opportunity for investors looking to profit from their return to favour.

It is by swimming against the current that this fund’s managers hope to uncover the best opportunities in a value-rich marketplace. For investors looking at government debt, and who aren’t averse to the possibility of generating meaningful returns as well, the Colchester Global Bond Fund presents an attractive prospect.

More on Colchester Global Bond Fund

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. 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. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. 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 an authorised financial adviser.

Topics covered

BondsFundsGlobal; Investing for income

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