Reap returns from a weak currency

The fund's manager, M&G head of fixed interest, Jim Leaviss, believes the UK sovereign rating downgrade could be a catalyst for further weakness in sterling. He thinks it is overvalued due to the UK's persistent current account deficit, and such large deficits have historically preceded a sterling crash.

However, sterling weakness is not the only reason why you should consider this fund. "It's a strong performer in the global bond sector," says Tom Purdie, research analyst at FundExpert.co.uk. "Over six months, the fund has returned 12.24 per cent compared with the sector average of 6.2 per cent. And we expect M&G to manage the fund to protect capital value in the event of extreme turbulence, for example by reducing duration. The fund is not benchmark-constrained and has no limits on duration positioning."

In January, the fund's duration was shortened from 2.4 to 1.6 years by selling UK government bond futures. A number of investors and advisers currently advocate bond funds with shorter durations (see last week's big theme Select fixed income for your Isa with caution). The fund is also not too large – £632.62m – which means it should be able to get in and out of positions more easily than larger funds.

The fund has a strong performance record, placing it among the top 25 per cent of performers in the Global Bonds fund sector over one, three and five years, in line with its aim to maximise long-term total return. The fund does particularly well in difficult markets, for example rising nearly 33 per cent in 2008 when the FTSE All-Share plunged by around the same amount. This could make it useful both as a portfolio diversifier and protection against downside.

Meanwhile, its global and flexible investment mandate means it is probably better positioned for the current fixed-income environment, according to some (see last week's big theme). Mr Leaviss can manage the fund's interest rate positioning, credit risk and currency exposure according to where he sees the best opportunities, and analyses macroeconomic factors such as inflation, interest rates and economic growth to determine asset allocation.

M&G Global Macro Bond Fund invests mainly in fixed-income assets, but can also invest in money market instruments, deposits, cash, securities and derivatives both for investment and efficient portfolio management.

The fund only yields 1.52 per cent, so is not attractive for income investors, and tends to lag in rising markets such as 2009, making a slight negative return in some years. Its total expense ratio of 1.41 per cent is at the upper end of charges among global bond funds – the peer group average is 1.21 per cent. However, this fund does more than a plain vanilla bond fund, for example employing shorting and derivatives. But if its short positions are incorrect returns could suffer, as is the case with the manager's currency calls.

But he has largely got it right so far, so with strong cumulative total returns and a flexible global mandate, this fund looks like a good way to play fixed income in current markets. Buy.

Source: Morningstar, *M&G Investments

Morningstar as at 11 March 2013

Top 10 issuers as at 31 January 2013

Currency breakdown