Returns justify re-entry to fixed interest – Tyndall

With the fixed interest index returning 6.4 per cent, investors should be seriously looking at re-entering the sector, according to Tyndall head of bonds Roger Bridges.

“I think fixed interest managers delivering 6.6 per cent is a good return, and for the investor who is risk averse, this is attractive,” he said.

“A fixed interest return should be at least CPI [consumer price index] plus 2.3 per cent.”

Bridges said a locked in 6.6 per cent return is now delivering value in a world where there is growing volatility in share markets.

However, he accepts the performance of share markets in the past five years have not made fixed interest investments very attractive.

“In the last five years we have had low risk, but fixed interest also delivered low returns; but this has changed,” Bridges said.

“The banks followed this low risk environment with lowering rates and Greenspan said there was no premium for duration, so that turned people off the sector.”

But the OECD has said interest rates will rise, so the world may be taking a different view of fixed interest, he said.

Locking in rates on bonds to get returns was achieved in the early part of the investment before the issuer renegotiated the return.

“When we lock in the rates it is 3.5 years, and that is where the value is achieved for the manager,” Bridges said.

“We would expect to see 50 per cent of our invested cash in a bond within that period before the issuer resets the rate.”

He argued that there were few investments that guaranteed that rate for three years, as even a fixed bank deposit rate usually doesn’t last that long.

“With volatility in bond markets low and the OECD forecast of higher rates, fixed interest is looking attractive.”

The lack of value in the Australian equities markets is making Tyndall look to move part of its mandates into cash for the first time.

Tyndall head of equities Bob Van Munster said he was getting cautious about the value for the Australian market, hence the flight to cash.

“The market is becoming risk averse and becoming complacent about returns,” he said.

“We can’t predict what will be the catalyst for a fall in the market other than there will be one.”

Tyndall’s benchmark for cash is 10 per cent, and Van Munster said in his 17 years running the fund he has never looked at moving the benchmark.

“We are getting close to pulling the cash trigger for the first time in 17 years,” he said.

“However, there are still value stocks in the market; they are just becoming harder to find.”

Van Munster said defensive stocks such as banks and infrastructure stocks with low P/Es were still one investment option for a manager such as Tyndall that sees itself as an intrinsic value manager.