Fundies seek alternative fixed income exposure

The underperformance of traditional fixed income assets globally is prompting fund managers to adopt alternatives within this space, according to US-based global investment bank Lehman Brothers.

In his outlook for global capital markets, Lehman Brothers chief global fixed income strategist Jack Malvey pointed to research for one year to April 26, 2007, which showed bond indices achieved global aggregate returns of 6.4 per cent, only marginally better than the world local currency total return of 5.6 per cent.

Commenting on the low yield curves, he said: “This is one of the slowest, most boring periods of performance for fixed interest I think we’ve ever seen.”

In order to prevent significant portfolio rebalancing away from fixed income into global equity and cash-based assets, he said managers of institutional and middle-market money in the US were increasing allocations towards absolute return strategies such as collateralised debt obligations (CDOs).

Grange Securities senior vice president and chief economist Stephen Roberts said Australia is expected to follow the US lead, but on a more gradual scale.

He said uptake of CDOs and other forms of structured credit was also happening here, but more gradually, because of our funds’ more conservative tendency to chase benchmark returns.

“There has been a bit of a shift toward absolute return, but probably not quite as pronounced yet as in the US market, but of course [we will] catch up over time.”

Malvey’s presentation also covered the US housing slump driven largely by an explosion in sub-prime lending, which he expects to continue to impact the US over the next two to three years without significantly impacting global markets.

“The world economy is in vigorous shape … the US is an outlier for the first time in many years,” Malvey said.

Speaking about official interest rate policy in the US and globally, Malvey said he expects the US Federal Reserve to remain static on rates for the rest of the year, without any further slackening until at least the fourth quarter of 2007 or early 2008.

Providing the Australian perspective, Roberts said: “We started the process of tightening monetary policy earlier than most other places, but we’ll probably continue it for a bit later … because we still have a strong high yield advantage compared to many other markets overseas.”

Malvey visited Australia this week in the wake of Lehman Brothers’ full acquisition of Grange Securities in March.