Leading research house Lonsec today released its Fixed Interest Sector Review, highlighting 2014 as a reversal of 2013 with traditional bond funds outperforming more credit intensive counterparts.
Australian Fixed Interest managers, after a strong 2013, generally had a tougher year; while Global Fixed Interest, after a dismal 2013, was the top performer within the fixed income universe with 7 out of 10 managers outperforming the Lonsec benchmark.
Diversified Fixed Interest managers, many of who aim to deliver additional return form a broader global opportunity, had mixed results – most delivered on lower risk but also lagged both Australian and Global benchmarks.
“This was pretty much a reversal of 2013,” Lonsec’s senior investment analyst for managed funds Libby Newman said. “Managers that changed tack quickly were able to benefit.”
“Fixed income investing has been rewarding for a generation and has served investors well as a ballast for growth assets. However, what worked in the past seems less suitable for the world ahead – be it a Japanese-style sustained low bond yield or a reversal of the 20 year bond rally.”
This changing environment has resulted, the report notes, in the rise of the unconstrained or absolute return bond funds.
“Unconstrained investing, which is primarily focused on delivering a positive absolute return, requires deep research commitment, sophisticated analytical tools and the integration of risk management at all stages,” Ms Newman said.
“The real appeal lies in the ability of unconstrained funds to deliver investor nirvana – a positive return when yields rise, mostly by being short duration and long credit risk; but also being long duration when yields fall – as they invariably do in risk off periods, 2014 has been testament to that.”
“The outcome of these funds is much more reliant on manager skill and the challenge becomes how to harness resources appropriately into a single strategy.”
The very flexibility and selling point for these funds makes them difficult to pigeonhole. At any one time they could be cash, bond or high yield funds or more likely, something in between. This makes them challenging to fit into traditional asset allocation models and requires particular vigilance by investors to ensure allocations are truly diversifying and not just amassing already embedded risk.
In the end, Ms Newman notes, it comes down to the role of fixed interest in a client’s portfolio. Is it to diversify growth assets? If so, the more conservative Australian options may be suitable. Is it to bolster income? The higher yielding credit funds may assist. Or it is to diversify both bond and equity exposures? The alternative – single strategy funds may play a role.
The review also highlights liquidity as a key risk factor for credit market going forward.
“In the wake of GFC, there have been a number of regulatory changes which have effects to market liquidity, such as Basell III regulations. Investors and their advisers should be aware of a number of regulatory changes which have effects to market liquidity.”
Other key findings of the report include:
While Australian Fixed Income underperformed in 2014, over the longer term (3, 5 and 7 years) it has outperformed benchmark with lower volatility.
The global hunt for yield – which has been a consistent theme for a number of years – continues with a greater acceptance of hybrids and emerging markets.
Seven funds were assigned Lonsec’s premier ‘Highly Recommended’ rating.
Leave a Comment
You must be logged in to post a comment.