Capital Gains Come First, Yield Second
Author: Manish Shah
Last Update: , :
|Morningstar recently upped its rating to five stars for the Julius Baer Global Income Fund. And for good reason. The multisector product managed by Donald Quigley ranked 12th among the 108 funds in the category for five-year performance. Average total return for the period as of June 15, 2003 was 7.31%.
||Julius Baer Global Income Fund|
Q: Among multisector bond funds, what is interesting about your fund is the performance has kept pace with the category while having more of an emphasis on foreign credits than U.S. fixed-income securities. How have you achieved this?
One of the advantages is I work at Julius Baer, which is a globally based shop. I'm able to get a much broader scope than my domestic competitors. Also, when you take risks overseas, remember the risk is more of an interest rate risk or a currency risk. We don't take credit risk overseas. Generally, we are going to buy government bonds or government agency type bonds. So, they are of extremely high credit quality from any country.
Q: Isn't Julius Baer based in London?
Julius Baer Investment Management has offices in New York and London, but Julius Baer Group is headquartered in Zurich, Switzerland.
Q: The fund has performed well in the last three years. You took over in 2001. You haven't experienced a bad period since 2000. What is the reason for the success?
In 2002, a lot of my competitors got hurt badly by the deterioration in the corporate bond market. We decided at the end of the first quarter to move to a more conservative position in corporate bonds. We also decided to put on higher U.S. interest rate durations. We also had favorable international bond exposure. Overseas, you can find higher interest rates and a better chance of price appreciation without a large increase in credit risk. Take a German bond versus a U.S. treasury bill, for example.
Q: Did you move more assets into foreign securities?
Into foreign securities and into higher-rated government securities. We had decent sized positions in treasuries. An example would be the province of Ontario, which is a Canadian province that was issued in U.S. dollars. We purchased that position and considered it a corporate bond position. The reason we did that was to continue having a higher yield than you would get in domestic treasures, but we weren't taking a real credit risk versus something like Ford. We decided to pull back in our credit risk and decided to go instead with interest rate risk. In 2001, we also had fortuitous positions in international bonds and good positioning in corporate bonds again.
Q: The annual turnover is over 100%, which is considered somewhat high for most bond funds. Are you more of a trader?
I wouldn't consider that high. We try to look at ourselves as investors and not traders. We're much more likely to hold a position for a longer period of time. But, remember, if I hold a treasury, it can be a 5% position. If I decide we want to move out on the yield curve or we want to buy a corporate bond, I sell that treasury and buy the corporate bond. That is going to increase my turnover numbers, but that treasury had very little credit risk and the interest rate risk can be justified for this type of fund.
Q: I looked up the fund from the Website. A bond investor by definition is a yield conscious investor. What advantage is there to investing in overseas securities in terms of yield consciousness?
When we invest in a security overseas, we're going to compare it to a U.S. fixed income security and ask, one, does it have a higher yield or two, do we feel that there is going to be greater potential price appreciation? Those are the two reasons that we will buy an offshore bond. Yield is important because yield translates into income. That is what a fixed income investor is looking for, a steady stream of payments.
Q: Is there a yield target that you aim for?
I don't have a yield target. I am a total return investor. To me, it is nice for the investor to get a steady stream of income, but I also feel that most investors in the end don't want a steady stream of income if they're going to be losing money in terms of market value. I am going to be driven more by total return than anything else. That is how performance is measured.
Q: Duration is difficult for the lay investor to understand, but it is important to bond fund managers. Can you elaborate?
Duration is basically the measure of interest rate risk that a bond has. For a bond with a higher duration, or yield to maturity, the price will be more affected by an increase or decrease in interest rates than a bond with lower duration. A T-bill, with a one-month duration is not going to be greatly affected by a change in interest rates. The price on that T-bill will have a very small change. A 30-year treasury bond will have a very large duration and that will have a very large swing in its price movement with a change in interest rates.
Q: Next is maturity, or basically how long it takes to get your principle back.
Correct. That is the case for a bond. For a fund, the weighted average maturity would be the weighted sum of all the maturities of all the different bonds in that fund. But, maturity to me is not the most important factor. Duration is far more important than maturity because there are certain bonds like mortgage-backed securities that may have a maturity of 30 years. But, as probably most of the readers know, prepayments are a problem. That is why a mortgage-backed security may have a 30-year maturity, but it may have duration of only two years. A corporate bond with a 30-year maturity that is not callable may have duration of about 12 years.
Q: What does classification mean?
It could mean a couple of different things, I guess. For me, it would be the different classes within the fixed-income market. The major sectors of the fixed-income market are treasuries, U.S. agencies, and corporate bonds, mortgage-backed securities. There isn't a well-developed market for mortgage-backed securities in the rest of the globe as in the U.S.
Q: Quality interests me the most. As a brainwashed U.S. investor that thinks domestic securities are at the top of the heap, how does an international bond expert view this perception?
I would argue that there is more than just credit quality in fixed income that is important. Also, as most of your readers have heard countless times, diversification is one of the most important things in your investment strategy. Diversification within the high-grade U.S. fixed-income market is so greatly enhanced if you broaden your scope of potential investments to include overseas investments. With this fund, I'll re-emphasize that we do not take credit risks offshore. You can get greater potential for appreciation in non-U.S. interest rates, especially now. And, you have higher yields. Again, the price appreciation and the higher yields are available overseas. You have a broader universe in which to invest. There are better opportunities throughout the globe. Maybe not always. If it is not, I will be focused all in the U.S. I should point out that this fund only purchases corporate bonds rated triple B or higher. That is investment grade. A lot of the competitors buy high yield. They might be having a great year this year, but over the last several years, high yield has not done well. At Julius Baer, we have a global high yield fund as well. We view this fund plus the global high yield fund as a good complement to each other.
Q: Why do you say this?
If someone is looking to go down in credit quality and obviously taking on more risk, but having higher potential returns, they go with the high yield strategy. I don't think most U.S. investors are looking to take a lot of credit risk throughout their whole fixed- income strategy. We're saying, here is one fund that is multisector: the global high yield fund. You put a portion of your fixed income assets in that and the rest, probably the majority, would go into the global income fund where we're not taking as great a credit risk. We're trying to employ more of a global perspective on interest rates, yield and currency positioning as well.
Q: Currency positioning has certainly helped global bond funds as the dollar has weakened.