iShares Overseas Government Bond Index Fund

ONE of the safest places to invest is in high quality government bonds, which have minimal credit risk unlike some of their corporate peers. However, it is still possible to lose money in this area, as recent events have shown, but the weakness has created a potentially attractive opening.

When interest rates are increased to tackle higher inflation, the fixed coupons on government bonds become less attractive and investors move their capital elsewhere. This process will continue until the prices fall far enough for the yields to become competitive, which is exactly what has happened in the last few years.

Those with exposure to the JP Morgan Global Government Bond Index ex UK will have lost 5.7% in 2021, 5.5% in 2022 and a further 4.9% in the first nine months of 2023. Three consecutive years of negative returns would be unprecedented and could signal a buying opportunity for anyone who is yet to open a position.¹ Please note past performance is not a reliable indicator of future returns.

The fall in prices has pushed government bond yields higher to the point that they are now more attractive than they have been for some time. If Western economies go into recession and reduce interest rates in response, the potential upside would be even higher.

In this type of scenario government bonds would offer an attractive risk-adjusted return, with one way to benefit being the iShares Overseas Government Bond Index Fund. It is a recent addition to the Fidelity Select 50 list of handpicked funds and was included as it offers great value for money with an ongoing charge of just 0.11%, as Tom Stevenson explains here.

This index tracker replicates the performance of the JP Morgan Global Government Bond Index ex UK that was mentioned earlier and has almost £3.7bn in assets under management. It is incredibly diversified with just under 1,000 different holdings around the world, although if you wanted exposure to UK government bonds you would need to add a separate UK-focused government bond fund.

Another factor in its favour is the high exposure to the US and Japan, which currently stand at 53% and 19% respectively. These are regarded as two of the world’s safest currencies and both tend to do well in a risk-off scenario, thereby enhancing the defensive potential of the fund.²

One way to measure the value on offer is to look at the yield to maturity, which measures the expected annual return if the bonds are held to expiry. This is 3.79%, which is higher than it has been for years, although the potential gain will also be affected by other factors including movements in the relevant exchange rates.³

BlackRock is an experienced investor in passive funds and the competitive charges mean that holders get to keep more of the gains for themselves. It is a lower risk option that holds investment grade government bonds issued outside of the UK and a good diversifier that should benefit in an environment of falling interest rates.

More on iShares Overseas Government Bond Index Fund

Five-year performance table

Past performance is not a reliable indicator of future returns

Source: Morningstar from 30.9.18 to 30.9.23. Basis: bid to bid with income reinvested in GBP. Excludes initial charge.

Source:

^1,2,3 BlackRock, 17.10.23

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. There is no guarantee that the investment objective of any Index Tracking Sub-Fund will be achieved. The performance of a sub-fund may not match the performance of the index it tracks due to factors including, but not limited to, the investment strategy used, fees and expenses and taxes. 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.