Buntrock is a portfolio manager responsible for $650 million in global fixed-income for the Loomis Sayles Global Bond Fund, which he describes as an active currency vehicle for U.S.-based investors. The portfolio holds assets in 14 currencies and from 32 countries and 90% of it is in high-grade assets.
Why are ex-U.S. investments receiving attention now?
If you look at the asset class, 2002 and 2003 were wonderful years. It got lost prior to that but was popular in the early to mid-1990s. When the equity market took off in the late '90s, the asset class lost its focus. Yields fell from 8-10% down to 4% and a global government bond mandate is not very interesting at 4%. It has recently been rediscovered because the dollar is currently facing pressure. We've seen two years of dollar decline, which we think is likely to extend into three or four years. The dollar bet is interesting right now. Interest rates in the U.S. are expected to lead the rest of the world up, so perhaps one can get better total returns in non-U.S. government markets. Also, global bonds have a zero correlation with the U.S. equity market. From a diversification perspective, the class does a wonderful job to balance a portfolio.
Are you concerned about inflation?
Inflation is a big concern in the U.S. right now. The Federal Reserve is being very accommodating with regards to rates, the fiscal situation is not particularly pleasant and the federal government is spending more money than it's taking in. You can draw analogies to the 1960s; today could be called 1960s-light. In the '60s there was a lot of growth in Japan and Germany and in the 2000s we're seeing a lot of growth in China. In the '60s the U.S. was engaged in a lot of overseas conflict, as it is currently, causing fiscal deficits that result in inflation.
At the moment we like Europe for bond investors because there is no inflation risk. While the Fed is tightening here in the U.S., we don't see the European Central Bank tightening until the middle part of next year. We're taking a central-bank barbell strategy, so to speak, and are investing in countries that are both ahead and behind of the U.S. in terms of raising rates. The United Kingdom, Australia and New Zealand started raising rates ahead of the U.S. and we have exposure to all of those. Europe is a defensive opportunity, there's not too much pressure going on there, growth numbers are low compared to the U.S. and inflation is not a major concern. We have 41% of our allocation in Europe, in euro and Scandinavian-denominated countries.
Where do you see opportunity in Asia?
The biggest component of our benchmark is in Japan, which represents almost 20% of our portfolio. But we're of two minds when it comes to Japan. We're not a big fan of Japanese bonds because we think they're going to have to reflate their economy. But we do think their currency is attractive. It's currently 110 yen to the dollar, but we think it's heading toward 100. We're also invested in Singapore dollars, which are tied to the yen and therefore are strong. There's strong upward pressure on Asian currencies in general and as the currency block appreciates in the next year or so, we'll get a little extra yield. Singapore's 10-year bonds currently yield 2 1/2-3%, while Japan's 10-years yield only 1 1/2%. Singapore's currency is linked economically to Japan and the Singapore government would like to see its currency appreciate, so we think you get a little extra yield there. We currently have 4% of our portfolio in Singapore's currency and bonds. We like McDonald's Corp. and AIG Insurance, who have issued bonds in Singapore's currency; they're credits we know and we get a little extra pick-up there. It's not a big bet, but I don't really want 20% of my portfolio in non-yielding yen.
Where else do you see relative value?
Commodity currencies are also attractive, namely Australia, New Zealand and Canada. We have 6-7% of our portfolio there and they've been excellent performers in recent years. The New Zealand dollar hit 38 cents and the Australian dollar, which was sub-50 cents at one point, is now at about 70 cents. They have appreciated as the U.S. dollar has become less attractive. Bonds in Australia are yielding more and Canada gets a little extra yield kick, but not a whole lot more. We're making risk bets relative to our benchmark, the Lehman Brothers. Global Aggregate Bond Index. We're underweight the U.S. dollar at 35%--not hugely underweight, but by about 6%, which is 10% less than we were a year ago. Our other big risk bet is in our duration, which is shorter than our index at 4.3 years, versus the index's five years. We're much closer to neutral than we have been in the past; there aren't a whole lot of screaming values so we have a defensive attitude right now.
Is global security a concern for you?
We're not overly concerned. We like to invest in countries where there is a rule of law and where you do have credit rights, so if something happens, you get your money back. As a result, we don't invest in Russia. Also, ironically, in some ways we don't know where safe-haven currencies are, so perhaps the global bond fund portfolio is a safe-haven place in and of itself. We're invested in 32 countries, 14 currencies and 40 different industries, so if there is some shock, it's not going to dominate one area.