Capital Preservation….what is capital preservation?
Simply put, it is an investment strategy that aims to maintain/preserve capital without incurring any losses. At InvestLife, capital preservation is one of the three pillars we use to build and manage our clients’ portfolios. Having a stable base, or foundation, rooted to a portfolio allows an investor to build out a solution that can ensure sustainable long term capital appreciation of their portfolio.
Before we dive into the T Rowe Price Global Dynamic Bond Fund, I thought it would be beneficial to give you some background information on bond funds and how they can be evaluated.
A background on bond mutual funds:
Bond funds offer an efficient way for investors to invest in bonds rather than buying individual bond securities, which can lower the risk exposure through effective management by the fund manager. Your typical pure bond fund is not an income fund, pure bond funds only hold bonds in it, whereas income funds hold a variety of government, municipal, and corporate debt, preferred stock, money market instruments, and dividend-paying stocks. Bond funds provide diversification and generally have a low required minimum investment.
The principal (face value) of a bond fund can fluctuate as it doesn’t have a fixed maturity date (due to the multiple holdings of various securities within the fund). However, you can evaluate the value of a bond fund by assessing it’s Duration or Weighted Average Maturity (WAM), where a higher value signalling that the fund will be more sensitive to interest rate fluctuations. This is the inverse relationship between bond yields and bond prices.
When the bond price is lower than the face value, the bond yield is higher than the coupon rate. When the bond price is higher than the face value, the bond yield is lower than the coupon rate. So, the bond yield calculation depends on the price of the bond and the coupon rate of the bond. If the bond price falls, the yield rises, and if the bond price rises, the yield falls.
Now let’s understand why this is the case:
- When interest rates fall, it causes a fall in the value of the related investments. However, bonds that have been issued will not be affected in such a way. They will keep paying the same coupon rate as issued from the beginning, which will now be at a higher rate than the prevailing interest rate. This higher coupon rate makes these bonds attractive to investors willing to buy these bonds at a premium.
- Conversely, when interest rates rise, newer bonds will pay investors better interest rates than existing bonds. Here, the older bonds are less attractive and will drop their prices as compensation and sell at a discounted price.
Therefore, it is more effective for investors to invest in bond funds who have managers that are skilled enough to manage and seek out opportunities when it comes to investing in bond securities.
T Rowe Price Dynamic Global Bond fund seeks to generate income while offering protection against rising interest rates and a low correlation with equity markets. Currently the fund has majority of its holdings in US Dollar cash, “We expect volatility to rise as markets digest the implications of slowing economic growth over the summer lull. Investors are grappling with several issues, including data-dependent policy makers, and draining liquidity which could lead to policy errors. In this climate, we believe that it is important to be tactical and keep a liquid profile in the portfolio.” This is the latest commentary from one of the fund managers, Quentin Fitzsimmons, and we at InvestLife are of the same opinion when it comes to market outlook. We believe that there is a current disconnect playing out in global markets, and that the not so confident FED are trying to manage the effects of inflation and rate changes may not be in as much control as we think. Therefore, it is important to have cash on hand as a fund manager to take advantage of the opportunities that may arise.
Currently, the fund has an average duration of 3,02 years, which is below the average of roughly 6 years. Duration speaks to the funds sensitivity to interest rate changes, and so for example if interest rates were to rise 1%, the average bond fund with a 6 year duration will see their price decline by 6%. In T Rowe’s instance that figure is 3%. Overall, the fund performed well in 2022, beating its benchmark as noted in the image below, but 2023 has yielded a more subdued performance. We still believe there is value in investing in the fund as it is well positioned to take advantage of the next FED announcement in September this year.
The fund is actively managed and invests mainly in a portfolio of bonds of all types from issuers around the world, including emerging markets. Specifically, the fund invests at least 70% of total assets in debt securities issued by governments, government agencies, companies and banks. The fund may invest more than 20% of assets in asset-backed securities (ABS) and mortgage-backed securities (MBS). It does not invest more than 10% of assets in shares and related securities, 25% of assets in convertible bonds, 30% of assets in money market securities, with total investment in these categories limited to 30% of assets. However, for temporary defensive purposes, investments in money market securities may exceed 30% of assets.
In conclusion:
Investing in bonds can be tricky…. Interest rate changes, monetary and fiscal policy announcements, and overall government operations can make it very difficult to find the right types of bonds to invest in. This is why we leave that to the experts, like the fund managers of T Rowe Price Dynamic Global Bond Fund. It is important that investors understand why they should invest in bonds, or bond mutual funds, and that is to preserve capital!
From the team at InvestLife we hope that this breakdown provided you with some useful information on the T Rowe Price Global Dynamic Bond Fund, and bond investing as a whole.
Wishing you a great weekend ahead, GO BOKKE!!
InvestLife Team
