HEAD-TO-HEAD: Alliance Bernstein vs Fidelity

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Investment approach

The AB Global Bond Portfolio Fund and the Fidelity US Dollar Bond Fund both aim to earn high US dollar returns for their investors, but they have different emphases, which is reflected in their portfolio compositions.

Perhaps curiously, the Fidelity fund’s stated primary objective is to generate high income “with the possibility of capital growth”, yet its average duration (a measure of the interest rate sensitivity of bond prices) of over six years, is much longer than the AB fund’s duration (1.44 years) – where total return, rather than income generation is the stated objective.

In fact, “the AB fund is structurally biased towards short duration bond holdings, because its benchmark is the short-dated Bloomberg Barclays Global 1-3 Year Treasury Index”, said Ng.

“The portfolio is focused on low-risk, high quality, defensive issues, and diversification is attained through a large number [214, according to the fund fact sheet] of sovereign and corporate bond holdings,” he said.

Around half the portfolio comprises government bond issues, including the UK, Japan, Italy and Singapore, as well as US Treasuries. About 45% of the fund is allocated to US issuers (including corporate bonds). The managers hedge their foreign currency exposure back into US dollars to further mitigate risk, according to Ng.

The investment process is team-driven, with contributions from several research groups.

“A quantitative team constructs econometric models using variables such as interest rate forecasts and yield curve projections, a qualitative team provides fundamental top-down macro research, and credit and securitised assets analysts deliver bottom-up views,” said Ng.

Turning to the Fidelity fund, Ng said the investment process also incorporates input from several specialist teams, including quantitative analysts, sovereign and credit experts and economists. The managers also tap into the firm’s equities expertise to augment the bottom-up credit assessments, Ng said.

The managers, led by Rick Patel, use these inputs to help construct a portfolio within a dynamic market context: liquidity, relative value between credits, historical yield spread relationships and also price momentum are factors in final bond selection.

“In practice, the fund concentrates on high grade issuers, with over 60% of the portfolio weighted to triple-A names,” said Ng.

“Rather than credit or currency risk, the fund takes interest rate risk,’ he added.

The fund’s current duration is around 6.5 years, which is close to the duration of its benchmark, the ICE BofAML Large Cap Corporate and Government Index.

“However, in the past it has typically tended towards a duration longer than the index,” said Ng.

Source: FE Analytics. Data in US dollars (13 June 2019)

Top 6 Holdings

Source: Fund factsheets, 30 April 2019

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