High-level volatility delivers pay outs

While last year was extremely volatile for fixed interest managers, there were some excellent performances.

UBS Global Asset Management head of fixed income for Asia-Pacific Stuart Piper says his company’s fund was 75 basis points above benchmark, a figure that helped the group take out the award for the best fixed interest manager in theMoney Management/Assirt Fund Manager of the Year awards.

“The volatility of the market is normally small, so you don’t get the leverage,” Piper says.

“But last year we played the interest market very well.”

At the beginning of last year, the global economy was coming out of the tech wreck and there were predictions of a slowdown.

“Things were slowing long before the World Trade Center events,” he says.

“There was a perception of a slowdown and we saw bonds rallying, so we went short.”

The three-year bond rate at the beginning of the year was 4.75 per cent and the 10-year bond rate was 10 per cent.

“We cut our interest rate exposure, as the market started to reappraise what was happening and people started saying there was going to be a v-shaped recovery,” Piper says.

“Bonds then sold off at about 100 basis points and 10-year bonds rose to six per cent.”

At this point UBS bought long, but when 10-year bonds went back to 5.5 per cent, the manager went neutral to benchmark as it felt they were fully valued.

By November last year, 10-year bonds were at five per cent.

“It was a volatile year for interest rates, but by November our reappraisal was for global recovery,” Piper says.

UBS gained 45 basis points for interest rate management during the year and another 25 points for sector selection. This is in an asset class where the difference between the top and bottom manager is less than one per cent.

Citigroup Asset Management, one of the other finalists in the fixed interest category, have an active investment style for fixed interest, says the group’s head of Australian fixed income Mitchell Stack.

“It is about capturing investment return from a variety of sources,” Stack says.

“We use a researched down process together with sector divergence and security selection for the investment process.”

The investment process focuses around interest rate divergence, stock selection and sector allocation.

“All of these decisions are backed by qualitative research,” Stack says. “Last year, we had success with interest rate decisions.”

Citigroup did also gain some basis point returns from its global fund management operations.

“Security selection is helped by having a team in the country that is issuing the securities,” he says.

“We benefit from this global position when there are decisions that affect the kangaroo market.”

The events of September 11 had very little impact on Citicorp’s overall fixed interest performance.

“If we look at the performance figures, there was a blip after September 11, but then the markets consistently outperformed.”

IOOF Funds Management was also a finalist in the fixed interest award.