Modified duration has played an important part in the Carmignac Portfolio Unconstrained Global Bond fund ever since it was launched, and over the past 18 months in particular.
In S1 2016, the fund's average modified duration was at eight, while today it sits at less than 1. The synchronisation of global growth and inflation, and the positive outcome from a number of European political events this year has been a welcome surprise and we believe countries such as France and Italy could now see an acceleration of growth.
However, Charles Zerah, manager of the fund, also believes the European Central Bank will soon start to turn hawkish and start preparing for tapering next year.
"We want to be prepared. Currently, we are cautious about rates across the fund, especially in global bonds. We are currently employing a number of hedging strategies, including shorting futures, 10-year and 30-year Bunds and shorting 10-year Gilts as well. We are still, and I should add we believe we will stay for some time, in a very low yielding environment. But we also realise we are coming in for an adjustment at a central bank level after a very long time of accommodating monetary policy in Europe. We are reflecting that in terms of modified duration in our portfolio."
Zerah's freedom of movement allows him to avoid any bias, and to withdraw from an asset class completely if necessary. But the fund's main difference is its flexibility, as it can adapt its modified duration (-4 to +10) to avoid any negative repercussions of higher interest rates.
For example, in the fourth quarter of 2016, the manager had positioned the fund in expectation of pressure on bonds, which mounted after the US election due to fiscal policy plans and the potential for reflation in the United States. The result was that the fund gained over 1% while its reference indicator lost more than two points. Carmignac Portfolio Global Bond fund has shown itself to be a resilient choice for investors seeking performance at a time when yields remain at extreme lows.
Click here for further reading on the Carmignac Portfolio Unconstrained Global Bond strategy.
