What is your view on where bonds are headed in the near term?

2014 has so far been a surprise for many investors, with the decline in global bond yields across most markets – particularly at longer maturities.

This has been driven by a reassessment of the appropriate neutral level of long-term rates, accommodative monetary policy and buying of high-quality government debt by central banks.

We expect all of these forces to fade in the second half of the year, resulting in upward pressure on yields.

We do believe that US neutral rates could be lower post-crisis (the reasons for which are well documented, such as lower productivity, drag from high levels of debt, worsening demographics), but not to the extent that is currently priced into the market.

In addition, we believe that investors will likely find it difficult to make high conviction forecasts into a world that could look quite different from today and consequently, once rates start rising it may be that their assessment of the neutral level of rates moves up – as has happened in previous cycles.

Most developed government bond markets are expensive and as a result, the fund is currently focused on capturing yield from other areas, such as credit. One exception is in Europe where Italian and Spanish government bonds have some further scope for yields to fall.

When do you think the US Federal Reserve is going to start hiking interest rates? What does this mean for investors?

Since the global financial crisis, the market has underestimated how long the Fed funds rate would remain on hold.

However, after five and a half years of a record low Fed funds rate, economic data suggests that these emergency low levels of interest rates are no longer justified.

We expect rates to rise in the US next year, most likely in the third quarter, given the economy appears to be delivering good levels of growth, with inflation firming and unemployment continuing to fall.

Against the backdrop of a firm economy, risk assets should continue to remain well supported, despite tightening monetary policy.

The risks are that a removal of stimulus proves to be more disruptive as this could lead to a pick-up in volatility within markets and begin to challenge valuations in some less liquid but yield-focused asset classes.

Longer dated government bonds may also come under pressure, as current valuations can only be sustained if the rate hiking cycle is modest and shallow.

If central banks find themselves “behind the curve”, they may have to deliver more tightening than they, and the market, currently expect.

Is it difficult to convince Australian investors to up their fixed interest allocation when infrastructure/high-yielding stocks are looking more attractive?

There has been much commentary on the great rotation out of fixed interest assets and into equities due to the low yields in traditional bond markets. However, this has not materialised.

One reason for this is that investment return is not the only consideration. Fixed interest assets offer valuable benefits of diversification and lower volatility, both of which help to dampen the swings in the total value of your overall investment portfolio.

That said, it will not be easy for investors to earn the level of return they have been used to over the last decade from traditional, investment-grade markets because the tailwind of falling interest rates can no longer help to boost returns.

As a result, the choice of fixed income strategy will be more critical going forward.

What kind of investors are you targeting with the Global Fixed Interest Total Return Fund?

We believe the fund will be of interest to advisers for retail investors, SMSFs and institutional investors.

We have seen general and growing interest in dynamic global fixed interest products that run benchmark-unaware strategies ('go-anywhere' strategies), for improved risk management and portfolio construction, particularly those providing exposure to global credit securities.

While having significant flexibility, the fund is expected to retain the defensive attributes of a fixed interest allocation, including diversification benefits and acting as a risk dampener during periods of equity market volatility.

What differentiates this fund from other fixed income funds in the Australian market?

The fund provides a contemporary solution to global fixed interest investing, and has been successfully utilised for clients in Europe, the UK and the US.

The fund follows a comprehensive investment process that includes top-down asset allocation supported by Henderson’s Investment Strategy Group – a team of seven senior fixed interest specialists – which leverages a total of 58 fixed interest experts in a bottom-up, “best ideas‟ approach to security selection.

The Henderson Fixed Income team managed $30.9 billion in assets as at 31 March 2014.

We believe the proven track record, combination of top-down and bottom-up analysis and our depth of global expertise provides a differentiated solution to Australian investors.

The fund can access a broad range of investment ideas around the globe and across the ratings spectrum. This breadth can enhance both return potential and diversification.

The strategy is not anchored to a traditional debt-weighted global fixed interest index which by construction is biased to most indebted issuers, and where returns are dominated by changes in the interest rate cycle.

In particular, the wider operating range for interest rate duration for the fund can provide more scope to mitigate downside risks from periods of rising interest rates.

How is your portfolio positioned when it comes to duration/credit?

Our strategic view over the last year has been to focus holdings more on credit-sensitive assets to generate yield and keep the interest rate sensitivity of the portfolio at the low end of the range.

The portfolio currently has an interest rate duration of around one year, which is expected to provide resilience should fixed interest yields begin to rise again over the remainder of the year.

We have been reducing high yield corporate bond exposure, as valuations are less compelling, in favour of senior secured loans and investment-grade securities.

What is your view on emerging market debt? Which are the countries to avoid, and which ones should investors be targeting?

The current allocation to emerging market government debt is low (around 5 per cent).

While investor positioning in the asset class is less crowded than a year ago, we continue to believe that higher US yields will be a challenging environment for emerging market debt.

In such a scenario, we would expect emerging market debt and currencies to underperform, albeit to more varying degrees than in 2013 when the surprise change in Fed policy led to forced selling across the board.

Our current focus in emerging market government debt is countries with strong fundamental stories/trajectories and high yields, such as Mexico.

We are also targeting those countries with slowing economies where significant monetary policy tightening has been priced into bond markets.

Brazil and South Africa may also present opportunities in this area.

We currently favour Mexico and Asian FX (ex-Japan) versus developed market currencies such as the euro, yen and Australian dollar. Currency appreciation in emerging markets will be less generic than in the past.