Creating a diverse portfolio of hybrid and fixed income securities has helped the two best-performing Australian bond funds, according to research.
The performance comes as in Australia, the Reserve Bank of Australia (RBA) had brought forward its expected date for rate rises while the US Federal Reserve declared an end to its large scale quantitative easing programme.
Shane Oliver, chief economist at AMP Capital, said: “While the RBA does not see the conditions being in place for a rate hike (sustained 2% to 3% inflation, full employment and 3% or more wages growth) until late 2023, it has effectively brought forward its assessment from 2024.
“We expect that the conditions could be in place by late next year and so are allowing for two rate hikes in November and December 2022 taking the cash rate to 0.5%. That said, this is still a year away and we agree with the RBA’s assessment that inflation pressures are less in Australia than in many comparable countries.
“For fixed income, monetary tightening initially means higher bond yields and so is negative for this asset class. Only when monetary policy becomes tight, seriously threatening economic growth, will long-term bonds decline significantly.”
According to FE Analytics, over one year to 31 October, the best-performing Australian bond fund within the Australian core strategies Australian bond sector was Yarra Enhanced Income which returned 6.24%.
This compared to average losses by the Australian bond sector of 3.07% over the same period.
This fund aimed to earn higher returns than traditional cash and fixed income investments over the medium to long term through exposure to a diverse portfolio of hybrid and fixed income securities. It also expected to produce less volatile returns than were inherent in equity markets while offering modest capital growth and franking credits.
This was followed by Elstree Enhanced Income which returned 6%. Like the Yarra fund, this also invested in hybrids and had low volatility due to a greater proportion of the total return outcome being attributed to stable cash and franked income with changes in the capital value of securities having only a minor impact, the firm said.
BetaShares Australian Government Bond ETF had seen the worst performance in the sector with losses of 7.9% followed by AMP Future Directions Australian Bond which lost 6.9%.
However, more funds had losses than returns with just 30 funds in the sector reporting positive gains over the period.
