Sensitivity of global inflation bond funds to macro factors
The data shows the sensitivity of global inflation-linked bond funds to changes in macroeconomic factors: global default spreads, global term spreads, global dividend yields and global interest rates. The higher the sensitivity, the higher the probability that performance will respond to changes in the selected factors. The top charts show the sensitivity of the funds to the factors, while the bottom charts show the monthly movements of the factors over the past five years. IPE and PureGroup chose the five largest global inflation-linked bond funds, in terms of assets, from the Morningstar database.
Sensitivity of global inflation-linked products to macroeconomic factors
1. Global default spreads – the default spread is the difference in yield between BBB and AAA global corporate bonds. Data suggests global default spreads will widen: a beneficial scenario for the Standard Life fund. The fund has maintained a positive sensitivity to this factor since H2 of 2011. However, wider spreads may be unfavourable for the other funds that have negative sensitivity. The PIMCO fund is vulnerable as it has been more responsive to changes than its peers. The Axa and Schroders funds are less likely to be impacted by wider spreads and may react similarly to changes in this factor. The Amundi fund is the fund least likely to be hurt by an expansion in spreads, as it has the lowest absolute sensitivity.
2. Global term spreads – the term spread is represented by the difference between long and short dated government bond yield values. In the current economic scenario, growth is unlikely to rise and there are downside risks, such as a hard landing in China. In this scenario, term spreads may contract which could be advantageous for all the funds as they have negative sensitivities to this factor. Any positive contribution from a contraction in spreads is likely to be the greatest for the Amundi fund. The fund’s sensitivity to term spreads was strongly positive until H2 2013 but is now negative. In absolute terms, this fund is the most responsive to term spreads. The Axa fund is less well positioned for a contraction in spreads as its sensitivity is close to neutral. The PIMCO, Schroders and Standard Life funds are more responsive, so are likely to benefit from tighter spreads, albeit to a lesser extent than the Amundi fund.
3. Global dividend yields – this factor is represented by an index of global dividend yields. With equities trading at high P/E ratios and the peril of negative earning surprises in a risk-off scenario, dividend yields may rise. This would act as a tailwind for returns for the funds, with the exception of the Standard Life fund. The Axa, PIMCO and Schroders funds are probably the best-positioned for rising dividend yields as they are the most responsive. Furthermore, their sensitivities have always been closely aligned. The Amundi fund has consistently been less responsive so is likely to benefit but to a lesser degree. On the other hand, an increase in dividend yields may have a negative effect on the performance of the Standard Life fund as its sensitivity has been negative since H2 of 2011.
4. Global interest rates – the interest rate is a composite of global short-term bond yields. With interest rates at historic lows, and dubious growth prospects, the outlook for global interest rates is ambiguous. Future movements are unlikely to influence the returns of the PIMCO fund as it is effectively neutral to this factor. On the other hand, the Amundi fund is likely to respond more strongly to movements in interest rates. The other funds may be affected by changes in interest rates, but to a lesser extent.
About the model
PureGroup’s Forward Perspective Model is a macroeconomic factor model built for the investment industry, covering open-ended, closed-end and exchanged traded products. The macroeconomic correlation modelling that drives the methodology was developed with US based academics and Parala Capital, founded by Professors Russ Wermers, Allan Timmermann and Steven Goldin. The model was based on their published papers in the Journal of Financial Economics in 2006 and 2013*.
It provides a unified approach to looking at open-ended, closed end exchange traded products, and captures over 8,000 investment products and additional share classes across asset types. The model analyses an investment product’s positioning to leading economic factors. In addition, the unified model allows for peer group assessment in an efficient and repeatable manner.