Schroders portfolio manager and head of fixed income, Kellie Wood, has shared the asset allocation in the firm’s Fixed Income Fund.
The Schroders Fixed Income Fund aims to offer high-quality income at attractive valuations with a focus on maintaining inflation protection.
Wood, who was appointed to the role earlier this year after Schroders merged its multi-asset and fixed income teams, said: “Our allocations to Australian credit, in both investment grade (26 per cent) and high yielding (10 per cent). We hold a small overweight to European credit and a neutral position in US investment grade and high yield credit given stretched valuations across the US market.”
It also holds exposure to mortgages in Australia and the US which provide the portfolio with quality assets, attractive yields and diversification.
To add protection, the fund is holding 8 per cent in inflation-linked bonds across both the US and Australia to protect against commodity price rises driven by geopolitics and the impact of fiscal expansion in the US.
As at the end of May, the portfolio was yielding 5.1 per cent with an interest rate duration of 5.4 years, which Wood said sets the portfolio up to generate robust income and deliver an uplift if central banks start cutting interest rates.
She noted the Reserve Bank of Australia (RBA) could move counter to these other global banks, however, and choose to do one hike rather than a cut. This means the move to monetary easing is more “country-relative” than a universal policy.
“The combination of weak growth and stalling progress on inflation leaves the RBA in a difficult situation with a further interest rate hike clearly the risk in the months ahead. The RBA has been very cautious in raising rates, trying to maintain the gains on employment while bringing inflation back to target.
“The current level of interest rates is clearly restrictive with Australia one of the most rate-sensitive economies and high levels of floating rate mortgage debt. However, services inflation remains too high and if progress on goods inflation has stalled, the RBA may be forced to implement another ‘insurance’ hike.
“As we close in on the end of this policy cycle, we see the opportunity in interest rates is a country-relative one. A stronger case for more interest rate risk may be made as the cycle progresses.”
