Government bonds are bonds that are issued by governments and are also referred to as ‘sovereign debt’. In the UK they are called ‘gilts’ and in America they are referred to as ‘US treasuries’. Government bonds of developed markets are usually deemed to be less risky than those issued by governments in emerging markets. The latter will usually pay a higher yield to compensate for the extra risk.
Although many of the fixed interest funds we rate may contain some government bonds, FundCalibre does not rate any purely government bond funds. Why? Because we are advocates of good, actively-managed funds and we believe that it is almost impossible for a fund manager to add value in this asset class.
In most asset classes, there are many different variables that can affect the valuation of a company, but this isn’t so for gilts. You’ve basically just got interest rates, inflation and economic growth to go on and the forecasting of each is extremely hard to get right. Gilt volatility is also very low, which again means there is very little room to add value.
The same can be said for government bonds of other countries with a strong credit rating, like Germany and the US. It’s only once you starting looking at places like peripheral Europe and emerging markets, where credit risk becomes another variable, that you get the extra volatility and a chance to make a difference.
So what’s the point of an actively-managed gilt fund? We’ll risk upsetting a few people now by saying we don’t think there is one. Yes, gilts have an important part to play in an overall portfolio, as they are negatively correlated to equities. However, we’d argue that most investors would be better off getting this exposure via a more diversified strategic bond or multi-asset fund – let a professional manager dip in and out when they have high conviction and stand a chance of making some money.