powered by GlobeinvestorGold.com

Andrew Allentuck

In this Issue

The Best Performance by a Bond Award

Andrew Allentuck

In a year of wretched returns, global government bonds were the winners in all bond categories and, for that matter, in every capital market category.

Tracking this sector of the debt market, the Citigroup World Government Bond Index, priced in Canadian dollars produced a 38.7-per-cent return for the 12-months ended Dec. 31, 2008. The next best performer was gold bullion priced at the London afternoon fix, up 30.0 per cent in Canadian dollars for the year.

What drove the terrific return of global government bonds was fear of default and bankruptcy. Virtually every index of the stock market was down. The MSCI World Index in U.S. dollars fell 40.3 per cent. The S&P Composite lost 38.5 per cent in U.S. dollars. The BMO Nesbitt Burns Canadian Small Cap Index dropped an appalling 46.6 per cent in calendar 2008. Bonds were not immune. For example, the Salomon Corporate Bond Index lost 4.0 per cent in U.S. dollars, though it gained 19 per cent in Canadian dollars as the loonie lost ground to the greenback.

The 2008 performance of the Citigroup World Government Bond Index was also helped by its composition. Heavy on G-7 sovereign bonds denominated in Euros, Yen, Sterling and U.S. dollars, it is the crème de la crème of asset categories. Each issuing government can manufacture currency to pay interest and redemption costs if necessary and each issuing country's currency outperformed the loonie.

Investors who had the foresight to put their money into global government bonds

had a fair range of choices of vehicles. About a hundred mutual funds offer exposure to

global bonds and within that category, the absolute top performer was the SEI Enhanced Global Bond Index O units, up 45.2 per cent for calendar 2008. The CIBC Global Bond Index rose 37.5 per cent in the period, followed by, among others, the AGF Global Government Bond Fund, up 26.9 per cent in the period. Worst performer — the Astra UBS Global High Income Fund, down 37.4 per cent in the period, a decline caused by blending in shares of Citgroup Inc., down by 80 per cent last year, and iShares Russell 2000 units, off a third last year.

Will it last? Probably not. Global government bonds tend to thrive in the midst of horrid world capital market declines. They did well in the 1998 collapse of the Thai baht, the same year that Long-Term Capital Management spooked the world fixed income market and Russia devalued the ruble, then defaulted on its bonds.

Global government bonds also tend to underperform hot stock markets when taking big risks on equities pays handsomely until the next collapse. Global government bonds are therefore the capital market equivalent of parachutes. Most of the time, they

are relatively inert.

For the tend years ended Dec. 31, 2008, the Salomon Brothers World Government Bond Index generated a ho-hum return of 3.6 per cent per year compounded annually. That beat the 2.3-per-cent average annual growth of Canada's Consumer Price Index compounded annually, but was no match for the S&P/TSX Capped Energy Index, up 14.1 per cent per year compounded annually for the decade.

In the first weeks of 2009, the world banking crisis has subsided from fears that

global banks might follow Lehman Brothers and fail overnight to the more restrained view that failures of global banks will be prevented by government action to pump in capital — usually by requiring banks to drop dividends to one cent, as Citigroup was forced to do, and by diluting shareholder interest with deluges of preference shares issued to governments.

Declining fear levels have translated into a slight softening of global government bonds. Yet prices continue to rise with, for example, the SEI Enhanced Global Bond Fund O units up 4.4 per cent for the 30 days ended Feb. 6, 2009.

Global government bonds remain lifesavers in a period of deeply troubled capital markets. For investors, the question is whether to buy the index, which is available in packaged form in funds like the CIBC Global Bond Index Fund with a 1.03 per cent management expense ratio. The fund has more than government bonds. A purer portfolio, the AGF Global Government Bond Fund, which gained 26.9 per cent in the year, has a 1.9-per-cent management expense ratio. That's high for a bond fund, but global debt is a sophisticated arena in which to play. There is no evidence that fees alone drive global debt portfolios. On the other hand, there is no need to pay a high fee to get top performance. The SEI Enhanced Global Bond Fund O, the category winner, has a 0.19 per cent management expense ratio and is sold as a no load fund in contrast to

several funds with trailing performance that have sales fees. By comparison, the Investors Global Bond Fund, up 17.4 per cent in 2008, carries a 2.22 per cent management expense ratio and optional sales fees.

Will global government bonds turn in a respectable performance in 2009? That depends on the future of the global financial crisis. If it subsides, chances are that money will flow to what seem to be bargain priced stocks. If the crisis continues, fretting investors will probably continue to buy and hold global government bonds. For now, the crisis continues.

Andrew Allentuck writes about investments for The Globe and Mail, and reviews books on finance for globefund.com and globeinvestor.com. He is also the author of several books.

Back to top