Fixed interest faces negative prospects

The Australian fixed interest sector could deliver negative returns to investors next year as it faces a subdued short to medium-term outlook fuelled by anticipated interest rate rises, according to Morningstar research.

The research house says the sector has been one of the least volatile asset classes over the past 10 years, however this does not mean investors will always receive positive returns.

“The short- to medium-term outlook for the…sector is subdued; with interest rates expected to rise, investors may even face the prospect of negative returns in the year ahead,” Morningstar says.

Morningstar makes the claims after conducting a review of 22 fund managers and 23 investment strategies.

The research group says tradition fixed interest products will also face stiffer competition for investors’ funds from other income-focused products.

“Traditional Australian fixed interest products face ever-increasing competition for investment flows from 'defensive' income-focused alternatives such as mortgage funds, high-yield funds, and diversified fixed interest funds,” the Morningstar review states.

Additionally, the research group says the ability of the local fixed interest market to deliver alpha is limited compared to other asset classes due to the relative low volatility of yields and returns in the sector, along with a lack of depth in the Australian corporate debt market compared to overseas.

These limitations mean that fees should play a significant role for investors when choosing a fixed interest manager.

“Most active managers assessed were successful in adding alpha from short duration positions over the last 12 months, but only a handful were successful over the preceding two years,” Morningstar says.