Morningstar Magazine - August/September 2017 - 50

Strategies

A Global Success
This newly minted Morningstar Medalist
stands out among world-bond funds.

BEST IDEAS: MANAGER

Eric Jacobson

This article is adapted from the fund's Morningstar
Global Fund Report dated May 23, 2017. Central to
this report is the Morningstar Analyst Rating, which
evaluates funds on five key pillars.
Prudential Global Total Return Bond PZTRX is
run by a fixed-income group that rivals the largest
in the industry and boasts massive investments
in people and analytics. Those efforts, and
relatively modest expenses, have earned this
fund a good long-term record. We initiate coverage
of the fund with a Morningstar Analyst Rating
of Silver.
Prudential's history of running insurance assets-
traditionally heavy in corporate bonds-has
influenced its overall style, and the firm boasts
at least 80 credit analysts. This fund has at
times held notable stakes in corporate bonds but
has often kept corporate exposure closer
to its benchmark, the Bloomberg Barclays Global
Aggregate Bond Index. It also treads lightly
in U.S. government debt, focusing instead on
securitized and emerging-markets fare. The firm
has staff covering those areas as well, and the
fund operates within a risk framework designed
to keep it from piling on too much relative
to its benchmark in any one area (interest rates,
currency, or credit, for example) or when such
exposures are combined.
The portfolio typically carries a higher risk profile
than its (unhedged) benchmark, and it lagged
the index during the 2011 eurozone crisis and the
taper tantrum of mid-2013. Those stumbles
haven't been catastrophic, and they've been

Morningstar August/September 2017

The team targets a goal of 200 basis points
of outperformance per year over its benchmark,
ideally averaging contributions of roughly
75 basis points from sector allocation, 50 basis
points from subsector and security selection,
40 basis points from currency allocations,
and 35 basis points from plays on duration and the
yield curve. With the use of its risk models,
the team also looks to cap the fund's tracking error
at 335 basis points.

countered by good long-term performance
compared with both the index and its peers.
Process Pillar: Positive ∞
Overall, the fund has managed strong execution
of a straightforward, well-developed strategy.
The managers focus on finding issues that have
good fundamentals but generate a healthy
amount of income. The firm has long gravitated
toward corporate credit given its roots as
a manager of insurance assets, but in addition
to both investment-grade and high-yield debt,
the fund's broader mandate favors securitized
assets, non-U.S. developed and emerging markets,
and very little exposure to U.S. Treasuries
and agencies. The fund's Bloomberg Barclays
Global Aggregate Bond Index benchmark
is unhedged, and the fund does make
currency plays within a risk-budget framework.
Overall, the fund relies on a mix of roughly
100 analysts and more than 100 portfolio
managers to marry their fundamental sector
and security research with the firm's macrolevel assessments.

While the fund has at times held notable
stakes in corporate bonds, it has often kept its
corporate exposure closer to its benchmark,
the Bloomberg Barclays Global Aggregate Bond
Index, which carried 19% in investmentgrade corporates as of March 31; the fund had
an even smaller mix of investment-grade and
high-yield debt (15%) at that time.
The fund also treads lightly in U.S. government
debt (8%) but has often found ample
opportunities in securitized (22%) and emerging-markets fare (19%). The former typically
comprise a bundle of commercial mortgage-backed
securities, collateralized loan obligations,
and a mix of nonagency and agency mortgages.
The fund's emerging-markets allocations were
reasonably diversified.
As of March 31, the firm assessed that a combination of aging demographics, high debt levels,
moderate global growth, and relatively muted
inflation would likely keep government bond yields
in a limited range, which underpinned this

Prudential Global Total Return Bond PZTRX
Growth of $10K 06/30/2017

Prudential Global Total Return Z

Stats 06/30/2017

10.42

12K
$

Morningstar Category

World Bond

Expense Ratio

0.63%

Fee Level

Below Average

Morningstar Analyst Rating

3-Yr. Total Annual Return

1.39%

3-Yr. Total Rtn Ctgy Rank

10
9.37
Morningstar Gbl Mkts
ex-US Govt Bnd TR USD

07/2014

07/2015

07/2016

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