Quarterly Unconstrained Bond Fund Update – Q4 2019

Product updates and commentary in response to key market developments.

Performance review

The US Federal Reserve completed its mid-cycle adjustment approach in October, whilst the European Central Bank, Bank of England and Bank of Japan all maintained a dovish policy stance. US President Donald Trump’s impeachment proceedings and slowing global economic growth remained market headwinds. However, sentiment improved after “phase one” of a trade deal between the US and China was agreed. Brexit uncertainty also moderated after the Conservative Party won a majority in the UK general election in December.

Global investment-grade (IG) credit spreads tightened by 16 basis points (bps) to 92 bps over the quarter. The US-China phase one trade agreement helped tighten both US IG credit (-19 bps to 90 bps) and corporate high yield (-37 bps to 336 bps) spreads. EU IG credit (-13 bps to 82 bps) and corporate high yield spreads (-59 bps to 293 bps) also tightened. Meanwhile, local emerging market debt (EMD) increased 5.2% and outperformed both hard currency EMD (2.1%) and corporate EMD (2.2%).

The Fund added to its positive inception-to-date returns this quarter and also outperformed the Libor 3-month USD rate benchmark. All underlying strategies added value. The core yield engine – namely Hermes and Post – remained a key driver of positive relative returns as central bank accommodation and liquidity continued to boost risk markets. Corporate high yield exposure was positive this period.

H20’s long volatility strategy outperformed despite subdued volatility over the quarter.

The rates-value positioning strategy added to its positive 2019 performance. In contrast to the third quarter, an underweight to Germany was rewarded. An underweight to the UK contributed in a period where gilt yields increased. However, unlike the previous quarter, an overweight position to US rates detracted. In currencies, overweights to the Swedish krona and British pound suited the market environment this period. This was slightly offset by underweights to the Swiss franc and Norwegian krone.

Meanwhile, allocation to Putnam’s opportunistic mortgage prepayment strategy continued to add to performance through exposure to mortgage credit.

Source: Confluence, Bloomberg. All returns are in US dollars, unless otherwise stated.

Performance (%)

Average annualised returns

Russell Investments Unconstrained Bond Fund USD Performance (%) USD 1 month 3 months Year to date 12 months 3 years 5 years Since inception
Return Gross of Mgmt Fee Class I Acc 0.6 1.6 7.9 7.9 4.7 - 4.5
Return Net of Mgmt Fee Class I Acc 0.5 1.4 7.0 7.0 3.8 - 3.6
Libor 3 Month USD Benchmark
0.2 0.5 2.4 2.4 2.0 - 1.9

Source: Confluence. Data as at 31st December 2019. Inception: 6 September 2016. Any past performance figures are not necessarily a guide to future performance.

Discrete rolling 12-month performance (%)

Average annualised returns

Returns shown in USD Q4 2014 -
Q4 2015
Q4 2015 –
Q4 2016
Q4 2016 –
Q4 2017
Q4 2017 –
Q4 2018
Q4 2018 –
Q4 2019
Return Gross of Mgmt Fee Class I Acc
- - 4.0 3.3 6.0
Return Net of Mgmt Fee Class I Acc - - 3.1 2.4 5.1
Libor 3 Month USD Benchmark
- - 1.1 2.0 2.5

Source: Confluence. Data as at 31st December 2019. Inception: 6 September 2016. Any past performance figures are not necessarily a guide to future performance.

Portfolio review

Asset allocation

Asset Allocation UBF Q2 2019

There were no significant changes to the Fund’s structure during the quarter.

Core Yield engine (credit): The total core yield exposure remains below target at 37.5%.

Diversifiers (currency real yield, volatility): Long volatility exposure has been broadly maintained over the quarter as market volatility remains low. The Russell Investments positioning strategies remain above their strategic weights. Overall, both sets of Russell Investments positioning strategies continue to play a key role in diversifying the Fund’s return profile

Opportunistic Strategies (High Yield, Local and Hard Currency Emerging Market Debt): The Fund has maintained its higher-than-strategic allocation to mortgage risk. The Putnam strategy exposes us to a unique combination of risk factors that have good return potential and excellent diversification characteristics. If rates rise, agency interest only strips (IOs) should perform well. Commercial mortgage-backed securities (CMBS) offer decent value in a credit market that does not offer value in many places.




Unless otherwise specified, Russell Investments is the source of all data. All information contained in this material is current at the time of issue and, to the best of our knowledge, accurate. Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.

The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.

Any past performance is not necessarily a guide to future performance.

Some investments/bonds may not be liquid and therefore may not be sold instantly. If these investments must be sold on short notice, you might suffer a loss.

Any reference to returns linked to currencies may increase or decrease as a result of currency fluctuations. Tax treatments depend on the circumstances of the individual client and may be subject to change in the future.

Decisions to invest should be based on the fund’s prospectus, ex-ante costs & charges document and key investor information document (KIID), with consideration to risk warnings. Copies available free of charge from Russell Investments.

Issued by Russell Investments Limited. Company No. 02086230. Registered in England and Wales with registered office at: Rex House, 10 Regent Street, London SW1Y 4PE.  Telephone +44 (0)20 7024 6000.  Authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN.


Please refer to the prospectus of the relevant [UCITS or AIF or EuSEF or EuVECA] and/or Information document of the relevant [AIF/EuSEF/EuVECA], and (where relevant) to the [KIID/KID] before making any final investment decisions.