Fixed Interest
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Dimensional Funds ICVC Global Short-Dated Bond Strategy Global Short-Dated Bond Fund (GBP, Income Class) Global Short-Dated Bond Fund (GBP, Accumulation Class) Dimensional Funds plc and Dimensional Funds II plc Global Short Bond Strategy Global Short Bond Fund Class B (EUR) Global Short Bond Fund Class N (NOK) |
Overview
Two factors explain the majority of returns from a fixed interest portfolio. The quality factor describes how low-grade obligations have higher expected returns than high-grade obligations. The term factor describes how long-term bonds have higher expected returns than short-term bonds. Dimensional believes, however, that these premiums have not been large enough historically to reward the additional risk. Therefore, we believe fixed interest is best kept short in maturity and high in credit quality. In implementing our fixed interest strategies, we employ a "no interest rate forecasting" investment philosophy. This philosophy is based on original research in the US by Professor Eugene F. Fama, which concluded that fixed interest markets efficiently price securities. It found that the best estimate of future yield curves is today's yield curve. This does not mean that the current curve will not change but that the changes are unpredictable.
Given a no-forecast approach, the issue becomes one of exploiting opportunities offered by the current yield curve. Dimensional calculates total returns over a specified time horizon, including income and capital gains implied by the yield curve. To maximise expected returns, Dimensional generally chooses shorter maturities in flat or inverted yield curve environments and longer maturities in upwardly sloped curves.
Dimensional's variable maturity fixed interest strategies are focused on yield curve management, the core of Dimensional's expertise in fixed interest. This no-forecast strategy seeks to maximise expected returns by determining the optimal maturity choice and holding period under the current yield curve. Maturities are shifted in response to changes in the yield curve when the increased expected return offsets trading costs. Dimensional's belief is that high-quality, highly liquid securities are efficiently priced by the market.
Global Short-Dated Bond Strategy
The arguments of active vs. passive, long vs. short, and static vs. variable maturities hold in developed bond markets worldwide as well. With global bonds, there is the concern of foreign currency exposure. Efficient-market research conducted on exchange rates found the same random walk phenomenon. Exchange rates move unpredictably. Currency exposure tends to increase the volatility of a fixed interest portfolio, while there is no reliable evidence to suggest that the expected return of exchange rates (assuming monies are invested in short-term currency deposits) is generally anything other than zero. Our belief is that currency exposure should be hedged in global bond portfolios. Generally, investors pursue global portfolios in order to diversify. Statistically, diversification should result in a lower portfolio volatility due to the combination of uncorrelated assets. If volatility is increased with the addition of global assets, the whole purpose of international diversification is defeated.
With currency exposures hedged away, the goal of diversification is attained. Introducing hedged foreign bonds into a domestic portfolio reduces the volatility of the portfolio. Portfolios of hedged global bonds, including the Global Short-Dated Bond Fund denominated in sterling and the Global Short Bond Fund denominated in euros, take advantage of imperfect correlations among developed bond markets and enjoy the classic benefits of diversification. Further, given the global nature of highly rated debt issuers, this international diversification can be reached without sacrificing the credit standards maintained in domestic portfolios.
In terms of returns, just as investors are no longer subject to the risk of one bond market, they are no longer subject to the expected returns of just one yield curve. Expected returns across hedged bonds differ as the shape of each yield curve is different. Portfolios can be formed that are tilted toward the higher expected return countries. In this case, portfolio maturities and country weightings follow a variable approach based on the expected return matrix generated for each eligible country.
PRINCIPAL RISKS
The principal risks of investing in these portfolios are as follows: market risk, credit risk, interest rate risk, foreign exchange risk, international investing risk, banking concentration risk, municipal securities risk, derivatives risk, and portfolio turnover risk. To more fully understand the risks related to an investment in the funds, investors should carefully read the prospectus of Dimensional Funds ICVC and in particular the section titled "Risk Factors."
Past Performance
Past performance of a fund does not necessarily indicate future performance.
When-Issued and Delayed-Delivery Securities
The value of securities purchased on a when-issued or delayed-delivery basis may fluctuate prior to their actual delivery. The yield available in the market when the delivery takes place may be higher than that obtained in the transaction itself, or the securities may not be delivered.
No Investment Guarantee Equivalent to Deposit Protection
An investment in a fund is not in the nature of a deposit in a bank account and is not protected by any government, government agency, or other guarantee scheme which may be available to protect the holder of a bank deposit account.
Charges to Capital
Certain fees and/or other charges in a fund may be charged against capital rather than income. This will enhance income returns but may constrain future capital growth.
Liabilities of Dimensional Funds ICVC
If the assets of any sub-fund are insufficient to meet the liabilities attributed to it, the excess liabilities may have to be met out of the assets of the other sub-funds.
Dimensional Fund Advisors Ltd. is authorised and regulated in the United Kingdom by the Financial Services Authority (FRN: 150100). For professional investors and advisers only. You should obtain relevant and specific professional advice before making any investment decision. Past performance is not an indication of future performance. Please read the Important Information.