Bonds sailing well amidst competitive storm
Traditional Australian bond managers continue to add value as they race to compete with the rush of alternative fixed interest products coming onto the market, according to a new report by InvestorWeb Research.
Its 2004 Fixed Interest Sector review covered the Australian Fixed Interest, International Fixed Interest, and Specialist Fixed Interest sectors for the 12 months to the end of September this year.
Senior investment analyst Rodney Sebire said the review, which covered 37 funds, found there was a “noticeable expansion of value-ad by the funds during the year, coupled with improved portfolio efficiency”.
Sebire said the expansion of value-add has been derived from a number of sources, including duration, sector allocation and individual security selection.
The value-add had occurred despite a “rush of alternative fixed income products entering the market aimed at usurping the popularity of mortgage funds and to a lesser extent traditional Australian fixed interest funds,” he said.
Australian bond managers enjoyed a “solid year”, according to Sebire, with the median manager outperforming the UBSA Composite Bond Index (All Maturities) by 55 basis points to the end of September 2004.
He said InvestorWeb is “mildly positive” on the outlook for Australian fixed interest markets, forecasting a “rising interest rate environment being somewhat mitigated by buoyant conditions for credit markets”.
The outlook for active management in the sector remains positive, he said, with managers “continuing to deliver attractive excess returns.”
“As credit continues to grow as a proportion of the index, managers have a broader range of value adding sources to generate alpha.”
The international fixed interest sector enjoyed a “reasonably stable year”, Sebire said, with investor returns “in line with expectations”.
Retail investor demand for global fixed interest securities appears to be “relatively light”, he said, with most investors preferring more credit exposure and less interest rate exposure.
The specialist fixed interest sector has continued to “grow and evolve” over the past 12 months, “given the entrance of a number of high-quality managers into the sector, coupled with retail investors general preference for yield”.
The review notes that the overall quality of these offerings are “extremely high”, giving investors an opportunity to “dilute some of the concentration risk inherent in the typical balanced portfolio”.
It cautions investors, however, to “recognise the inherent credit risk or the potential for capital losses in these funds, despite a majority of them being positioned as income orientated or defensive funds”.
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