Morningstar recently published its Global Flexible Bond Funds Report, examining performance over the past year and where managers are turning to find value.
The report shows that global flexible bond managers who embraced corporate credit and high-yield bonds saw solid returns in 2024. Despite tight corporate credit spreads, investment-grade bonds – especially in the US – faced reduced attractiveness in selection.
Managers who excelled in 2024 largely did so through a dynamic approach and ability to capture relative value opportunities as these emerged across various sectors, regions, and maturities.
Looking ahead, what are the main challenges and risks to consider when investing in global flexible bond funds?
“Global flexible bond funds fared well on average during 2024. Their performance was largely supported by investors’ strong risk appetite, which resulted in credit, and high-yield bonds in particular, outperforming against the backdrop of a broad narrowing in spreads and a more uncertain outlook for rates.
“Looking ahead, the managers’ outlooks remain cautious. Dispersion across corporate sectors is expected to remain, as many managers argue there is still value in financials, while challenged sectors like autos may face durable headwinds.
“Investors in global flexible bond funds should be patient, as the nature of these strategies can lead to both significant underperformance and impressive rebounds over short timeframes. This boom-or-bust pattern requires a strong stomach, therefore they should be considered in the context of a long-term investment horizon,” commented Giovanni Cafaro, Manager Research Analyst, Morningstar
Key takeaways include:
- A risk-on stance paid off for global flexible bond managers in 2024 as corporate credit and high-yield bonds outperformed over the year.
- Many global flexible bond fund managers avoided making large duration bets in 2024, instead focusing on relative value plays between regions and sectors, as well as popular trades like US agency mortgage-backed securities.
- Pimco GIS Income captured the most flows, remaining a popular choice among European and Asian investors seeking high income with moderate credit risk.
- As 2024 ended with corporate credit spreads reaching their tightest levels in several years, many bond managers argued that investment-grade bonds were looking increasingly unattractive, particularly in the US.
- Dispersion across corporate sectors is expected to remain, as many managers argue there is still value in financials, while sectors like autos and real estate face durable headwinds.
- Choosing a global flexible bond fund calls for a careful assessment of several factors, including the investment team’s expertise, their track record across market cycles, and their ability to balance top-down and bottom-up considerations
GLOBAL FLEXIBLE BOND FUNDS OUTPERFORMED IN 2024 DRIVEN BY CORPORATE CREDIT AND HIGH-YIELD BONDS
Morningstar recently published its Global Flexible Bond Funds Report, examining performance over the past year and where managers are turning to find value.
The report shows that global flexible bond managers who embraced corporate credit and high-yield bonds saw solid returns in 2024. Despite tight corporate credit spreads, investment-grade bonds – especially in the US – faced reduced attractiveness in selection.
Managers who excelled in 2024 largely did so through a dynamic approach and ability to capture relative value opportunities as these emerged across various sectors, regions, and maturities.
Looking ahead, what are the main challenges and risks to consider when investing in global flexible bond funds?
“Global flexible bond funds fared well on average during 2024. Their performance was largely supported by investors’ strong risk appetite, which resulted in credit, and high-yield bonds in particular, outperforming against the backdrop of a broad narrowing in spreads and a more uncertain outlook for rates.
“Looking ahead, the managers’ outlooks remain cautious. Dispersion across corporate sectors is expected to remain, as many managers argue there is still value in financials, while challenged sectors like autos may face durable headwinds.
“Investors in global flexible bond funds should be patient, as the nature of these strategies can lead to both significant underperformance and impressive rebounds over short timeframes. This boom-or-bust pattern requires a strong stomach, therefore they should be considered in the context of a long-term investment horizon,” commented Giovanni Cafaro, Manager Research Analyst, Morningstar
Key takeaways include: