Accessing the global bond market, a Herculean task?

Cara Milton-Edwards
Cara Milton-Edwards
Fixed Income Product Strategy

Capital at risk. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed.

Investing beyond domestic bonds

Being able to access the global bond market is essential for investors to build diversified global portfolios. Investors who lack true fixed income diversification can become particularly vulnerable to sudden market moves. In multi-asset portfolios a global fixed income element can help investors to seek ballast against equity market risk and pursue relatively stable income. Chart 1 and 2 illustrate this point visually:

Chart 1 compares the historical total returns of the Bloomberg Barclays Global Aggregate Index to the MSCI All Country World Index (ACWI). Over the entire analysis period (including higher volatility periods) total returns for global bonds (represented by the Bloomberg Barclays Global Aggregate Index) have exhibited lower volatility compared to total returns of global equity (represented by the MSCI All Country World Index (ACWI)). Chart 2 exhibits the 1-year rolling correlation between the both indices. Historically, the correlation has been fluctuating around zero enabling investors to achieve diversification in their portfolios.

Chart 1: Total return history Bloomberg Barclays Global Aggregate Index and MSCI All Country World Index (ACWI) from 2006-2018

Chart 1

Source: Bloomberg, as at June 2018

Chart 2. 1-year rolling correlation between Bloomberg Barclays Global Aggregate Index and MSCI All Country World Index (ACWI)

Chart 2
Past performance is not a reliable indicator of future results.

Source: Bloomberg, as at June 2018

Investors cannot invest directly in an index. Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund. “High Vol Period” computed based on VIX Index. If VIX Index level on a given day is higher than one standard deviation above long-term average (long-term average = average VIX index level from 2006-2018) we categorize this day as a day with higher market volatility.

Given the diversifying effect, investors incorporate the Bloomberg Barclays Global Aggregate index as strategic building block into their global portfolios. However, not all investors have the infrastructure, time, expertise and human power to construct a portfolio themselves that is able to closely track a universe of such large scale. Currently, the Bloomberg Barclays Global Aggregate index contains:

  • More than 20,000 investment grade bonds ranging from treasuries, government-related, corporate to securitized bonds
  • More than twenty local currency markets (including both developed and emerging markets)

Yet it is essential to be able to seamlessly gain access to such a broadly diversified exposure in fixed income.

Searching for true fixed income diversification building block?

iShares Global Aggregate Bond $ UCITS ETF (AGGG) can be the answer to this challenge. In one single transaction, investors can gain instant access to a fund that replicates the Bloomberg Barclays Global Aggregate index - a solution that can provide investors an overall experience that is vastly more convenient than do-it-yourself.  Some key facts:

  • Competitive TER: 10bps p.a. for unhedged and hedged share class
  • Physical structure: AGGG holds underlying cash bonds (i.e. no synthetic replication)
  • Currency hedged share-classes: USD, GBP and EUR hedged currency share classes available to mitigate exposure to FX fluctuations
  • Hedging risk: The Fund will attempt to reduce (or ‘hedge’) the risk of currency movements between the Base Currency and the currency in which some or all of the underlying investments are transacted. Depending on the exchange rates, this may have a positive or negative impact on the performance of the Fund. The hedging strategy employed will not completely eliminate the exposure of the Fund to movements between the Base Currency and these other currencies.

 

Want to know more about iShares Core Global Aggregate Bond UCITS ETF (AGGG)?

Hear from Sid Swaminathan, Head of Core Portfolio Management EMEA, as he explains why clients should consider AGGG as building block for their portfolios and outlines the investment process of AGGG.

Given the attractive features AGGG has rapidly gained popularity which is reflected in remarkable asset growth since its inception in November last year (Chart 3). Starting with USD 500mn seed capital the fund crossed the USD 1bn mark in April this year and trend is pointing upward.

Chart 3. AGGG asset under management growth since fund inception

Chart 3

Chart source: BlackRock, as at June 2018

AGGG turns global bond market access to an affordable and convenient experience. Accessing the global bond market does not need to be a Herculean task for investors.

Capital at risk. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment.

Credit risk – government bonds: Fixed income securities issued by governments can be affected by the perceived stability of the country concerned and proposed or actual credit rating downgrades.

Credit risk – corporate bonds: The Fund invests in fixed interest securities issued by companies. There is a risk of default where the issuing company may not pay income or repay capital to the Fund when due.