Category: Fixed Income

Fixed income is an investment approach focused on preservation of capital and income. This investment class is relatively safe with low volatility and forms an ideal investment option for people looking at fixed returns with low default risk. It typically includes investments like government and corporate bonds, Negotiable Certificate of Deposits and money market funds.

Categories
Fixed Income Fixed Income

Fund which provide stable return, diversification by investing bonds

To invest in a diversified portfolio of government and corporate bonds that aims to deliver relatively stable returns with less fluctuation than investing in shares and property.

Approach

FirstChoice Fixed Interest applies a steady multi manager approach, investing in a diverse line up of Australian and global fixed-interest managers. Portfolio returns are driven by the combined effect of blending different active management styles with passive strategies, aiming to achieve style diversification. 

The CFS Investments team decides each manager’s strategic weighting in the portfolio after determining outcomes in the trade-off between potential outperformance and risk. Changes to the strategic weights must first receive approval from the investment committee. External manager screening begins with Mercer’s manager research efforts, which are used to initially screen most managers to build a quality short-list universe. For internally generated ideas, Mercer is also used as an initial sounding board. The team maintains constant dialogue with Mercer about ratings changes and portfolio construction. It then drills down further into the research on short-listed managers, including overseas travel for onsite visits. The team is responsible for manager selection, mix, portfolio review, and monitoring. Portfolio rebalancing to target-weighted manager allocations occurs daily, and tolerance levels are used to avoid unnecessary trading. 

Portfolio

This portfolio invests its funds with seven underlying managers. At November 2021, allocations included a global-aggregate strategy from Wellington (19%) and Morgan Stanley (9.5%), bottom-up global credit strategies from Loomis Sayles (10%) and Franklin Templeton (12.5%), and global sovereign and currency strategies from H2O (9.5%), and Colchester (11.5%). Passive indexed Australian bond exposure is run by First Sentier (28%). Active allocation was reduced from 13% in 2016 to 8% and finally removed altogether in February 2020 following the departure of senior investors in Louisville, Kentucky. The style diversification of managers alongside some passive exposure makes for a durable portfolio suitable as a core holding but one that may also lead to benchmark-like returns.

Performance

FirstChoice Fixed Interest has a solid long-term record, in particular since the global financial crisis. It is ahead of the peer group average and ahead of its own 50/50 composite benchmark net of fees, made up of the FTSE World Broad Investment Grade Index (hedged to AUD) and the Bloomberg AusBond Composite 0+Yr Index. The strategy has consistently outpaced most peers over the long term, though in 2014 and 2015, it trailed the index as bond yields fell, with First Sentier detracting because of a short-duration stance on Australian rates. Colchester’s underweighting in Europe, Japan, and the UK hurt as their yields continued to fall in the first half of 2016. Colchester staged a rebound in the second half that continued through 2017. As in 2017, strong performance from H2O was a key driver of outperformance for the strategy in 2018. This continued into 2019 with H2O contributing significantly to outperformance. The year 2020 was a challenge, with the coronavirus pandemic causing havoc in global markets, Franklin Templeton contributing negative, and below-index performance for the year. 2021 has been difficult, with bond market sell-offs during February and October creating large drawdowns category wide for managers with meaningful duration exposure. Still, over the trailing three-, five-, and 10-year periods to November 2021 the strategy remains in the top quartile for performance.

Top 10 Holdings of the fund

C:\Users\Akhila\Downloads\fixed interest.png

About the fund

To provide relatively stable returns with low potential for capital loss by investing in Australian and global fixed interest securities .To outperform the composite benchmark of 50% FTSE World Broad Investment Grade Index, hedged to Australian dollars and 50% Bloomberg AusBond Composite 0+Yr Index over rolling three-year periods before fees and taxes

The investments are managed by a number of leading fixed interest managers comprising an index manager whose investments aim to mirror the index, and active managers who aim to outperform the index. This is designed to deliver more consistent returns with less risk than would be achieved if investing with a single investment manager. The portfolio aims to hedge currency risk.

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

Cheap passive exposure to Australian fixed income

Approach

This strategy aims to track the Bloomberg Ausbond Composite 0+ Index with a tracking error of 0.05% per year or less (before fees). IShares is typically able to achieve full replication of the government-bond component in the portfolio because of ample liquidity and breadth. To alleviate liquidity challenges, the firm uses stratified sampling to acquire corporate and supranational exposures–an industry-standard approach, but one in which iShares excels thanks to its sophisticated global trading systems and experienced team. When the team can’t buy all the bonds in the index at a reasonable price, it will instead buy a basket of bonds that has similar credit and duration risks within allowable tolerance ranges. The team also employs strategies like securities lending to generate additional returns, helping to offset the performance drag from factors like fees and trading costs. IShares’ scale further minimises trading costs; a large active book and the firm’s ETF business allow for cross-trades and wide broker access. IShares thus executes trades cheaply, which is crucial in index fund management. It’s worth noting that Bloomberg’s index assumes distributions earn no interest, whereas iShares may accrue interest on its distribution cash balances. This may cause some tracking error, but ultimately it is a positive tailwind.

Portfolio

This strategy aims to fully replicate the Bloomberg AusBond Composite 0+ Index. Factoring cost, liquidity, and existing diversification if it doesn’t make sense to own all the bonds on issue, it will use stratified sampling to buy a basket of bonds with similar credit and duration risks. As of 28 Feb 2022, the index was composed of government and semigovernment bonds (85%), supranationals (5%), and corporate bonds (9%). The fund invests in high-quality bonds, with AAA rated debt constituting 71% of the benchmark’s quality exposure. Banks and other financials issue most of the credit in the index. The fund’s duration continues to increase with the benchmark as yields mostly hovered around historic lows barring the recent spike, up from 4.95 years at October 2016 to 5.8 years at 28 Feb 2022. The lengthening duration is a result of Commonwealth Government Bonds being issued at longer tenures, such as 30 years. But it means the fund faces the risk of rising yields globally, when we would expect active managers in this space to outperform their long-duration passive peers. Overall credit quality and appropriate diversification make this strategy an appropriate core exposure.

Performance: In terms of Annualised and Cumulative basis

Top 10 Holdings of the fund

About the fund

The fund aims to provide investors with the performance of the Bloomberg Aus Bond Composite 0+ Yr Index SM, before fees and expenses. The index is designed to measure the performance of the Australian bond market and includes investment grade fixed income securities issued by the Australian Treasury, Australian semi-government entities, supranational and sovereign entities and corporate entities.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

TIAA-CREF Core Plus Bond Fund Premier Class

They need an advice. Young married couple talking while sitting on the therapy session with psychologist

TIAA-CREF Core Plus Bond has an experienced lead manager and the solid process remains intact, while the expansive supporting cast has only broadened. Veteran manager Joe Higgins, who has led the sibling strategy TIAA-CREF Core Bond TIBDX since 2011, took over this strategy at the end of 2020 when longtime lead manager Bill Martin retired.

Approach

Lead manager Joe Higgins continues the thoughtful relative value approach that has been in place both here and on his other charge, TIAA-CREF Core Bond TIBDX. This strategy earns an Above Average Process Pillar rating. Higgins has the ultimate authority in ensuring what holdings go into the portfolio but draws heavily on the strength and expertise offered by the sector managers, analysts, and macroeconomic strategists in identifying relative value opportunities across the fixed-income universe. The strategy can invest in everything from corporate bonds and mortgages to municipal bonds and emerging-markets debt, with the higher-risk sectors like high-yield bonds, bank loans, and emerging-markets debt ranging between 10% and 30% depending on the team’s outlook and risk appetite.

Portfolio

As of December 2021, the portfolio’s largest exposures were to investment-grade corporate bonds (24.2% of assets), agency mortgage-backed securities (18.6%), and emerging-markets debt (10.2%). The emerging markets exposure rarely if ever broke double-digit threshold, but its allocation has been on the upswing since March 2020 given the portfolio managers’ belief in its ability to outperform over the long term. The emerging markets’ relative lack of direct correlation to domestic corporate moves, as well as premium on offer from new issuance, make them attractive. 

People

Joe Higgins, who replaced longtime lead manager Bill Martin at the end of 2020, is a seasoned and capable manager supported by three experienced comanagers and a robust analyst team. The strategy earns an Above Average People Pillar rating.

Performance

The strategy under Joe Higgins’ tenure has bested almost 70% of distinct peers in the intermediate core-plus bond category, keeping up with the record his predecessor Bill Martin set during his tenure from September 2011 to December 2020. Over that period, the Institutional share class returned 4.5% annualized and outpaced roughly two thirds of peers. While lagging performance punctuated this record at various points, most notably in March 2020, by and large “measured consistency” was the characteristic on display for this strategy’s performance.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

Western Asset Australian Bond Trust – Class M: Among the best in the Australian Bond

20025825 - closeup image of businessman drawing 3d graphics

Western Asset Australian Bond is a compelling choice for domestic fixed-interest exposure owing to its bestin-class team and straightforward approach. Anthony Kirkham, head of investment/portfolio manager, is the leader of this strategy, and we have high regard for his investment knowledge and skills.

Approach

The philosophy of the team is to identify mispricings within sectors and securities allocating active risk in areas in which it has conviction while ensuring the portfolio remains diversified to avoid singular themes being pervasive through the portfolio. The team takes account of global macro insight from the global investment strategy committee and overlays its domestic market knowledge to come up with a base-case expectation looking forward six to nine months depending upon their conviction. In addition to this, the team develops multiple upside and downside scenarios as a risk-management framework. 

Portfolio

The portfolio can invest across government, semi-government, supranational, credit, securitised assets, inflation-linked bonds, and cash. As of November 2021, over 40% of the portfolio was invested in investment grade corporate bonds, around 25% in semi-government issues, 20% in government, 10% in supranational, with a small amount of mortgage-backed and asset-backed securities. Active duration moved short relative to the benchmark around mid-2021 but came back in line with the index around year-end. Similar to most Australian bond managers, they entered 2021 overweight in credit, indicative of their opportunistic profile.

People

The fund is managed by a seasoned team of investors who remain dedicated to this strategy. The team is led by Anthony Kirkham, who has had more than 30 years of wider experience, including nearly two decades at Western Asset Management and leading this strategy since 2002. Kirkham has credit analyst, dealer, and portfolio manager experience working for Commonwealth Bank, Metway Bank, RACV Investments, and Citigroup. He is supported by Damon Shinnick, who is a portfolio manager with a focus on credit portfolios.

Performance

This strategy has performed well over the medium and long term, especially compared with peers. It has delivered returns above the Bloomberg AusBond Composite Index, net of fees, over the past decade. That is ahead of its target return of 75 basis points (gross of fees) over the benchmark and market cycle. A tracking error of 100 basis points is targeted. Perhaps more impressive, though, is that these results put the strategy’s flagship A share class in the first quartile of its Morningstar Category over the trailing three, five, and 10 years to December 2021. Sector allocations and credit exposure continue to drive performance.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

Schroder Fixed Income Fund – Client Class: Above par on multiple counts

Fund Objective

To outperform the Bloomberg AusBond Composite 0+Yr Index after fees over the medium term.

Approach 

Schroders begins by formulating long-term (10-year) risk/reward forecasts using a building-block approach that includes current yield, long-cycle economic growth, and inflation. These figures are adjusted to shorter term forecasts (three years) based on a proprietary three-factor model that considers valuation, cycle, and liquidity characteristics to identify best- and worst-case risk-adjusted opportunities. Broad risk allocations between cash, bonds, and credit are consequently generated. The team then determines the appropriate trades and physical securities. Risk/reward forecasts dictate positions in duration and curve (domestic and other yield curves), cross-market trades (spread compression between assets in varying geographies), and credit selection (investment-grade, securitised, high yield, and emerging markets). Credit assessment focuses on market position, management quality, firm profitability, and capital structure. The strategy is mostly process-driven, and the long-term capital preservation mindset is a point of differentiation.

Portfolio 

A wide remit of securities can be held, including government, semigovernment securities, investment-grade credit, high-yield, emerging-markets bonds. Derivatives can be used to express credit, rate, and curve views. The team’s caution over valuations saw it hold more cash than most of its cohorts with a short duration bias through most of 2010-18, sizeable at times. Schroders has long held an underweighting in government and government-related securities in lieu of corporate credit, inflation-linked bonds, and cash. As spreads compressed, investment-grade credit fell steadily to 12% in April 2017 from 42% in August 2010. Schroders waded back in to capitalise on more-attractive valuations as global policy support followed in early 2020. It shortened interest-rate duration significantly in early 2021 as concerns over inflationary pressures bubbled to the surface, before softening this stance amid questions over its persistence. By the third quarter of the year, Schroders’ view that higher inflation was more structural saw it re-enter a more-entrenched short-duration stance. Holdings in non-Australian bonds has tended to be about 10%-15%. This vehicle can be used as a core exposure given it mostly holds high-grade bonds. Schroders managed about AUD 2.8 billion in this strategy at 30 June 2021

Performance 

The strategy has had its share of ups and downs over the years, with strong results during 2019-20 offsetting a fallow run that preceded it. The absolute return focus and cautious posture cost relative performance as yields and spreads broadly tightened during 2014-18, notably its short-duration position particularly in the US and preference for cash. An average cash weight of about 20% from 2009 to 2019 was a major drag, though this weighting declined noticeably after 2016. By contrast, the move to a long-duration position in early 2019 helped as yields declined and Schroders handled the volatile conditions in 2020 adeptly. Its long duration position in early 2020 helped it navigate the initial phase of the pandemic, supported by a reduction in credit risk. Its quick reallocation to credit as spreads widened helped sustain outperformance through the rest of the year. An indexlike result over the majority of 2021 saw the team navigate the choppy moves in yields particularly well over the first half of the year before being stung as shorter-maturity yields leapt exponentially higher after the RBA suddenly decided to exit yield-curve control in the third quarter. The strategy has done well in down markets because of the higher-quality portfolio and focus on downside protection. Its high-conviction approach can contribute to meaningful and lengthy deviations from its cohort.

Top Holdings

About the fund

The Fund is an actively managed, low volatility strategy that invests in a range of domestic and international fixed income assets with the objective of outperforming the Bloomberg AusBond Composite 0 Yr Index, whilst delivering stable absolute returns over time. The Fund adopts a Core-Plus investment approach whereby a core portfolio comprising Australian investment grade bonds is complemented by investments in a diverse range of global and domestic fixed income securities.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

TCW Emerging Markets Local Currency Income Fund Class

Approach

A combination of flexibility and caution, as well as a thoughtful approach to country and currency analysis, continue to support a High Process Pillar rating. This strategy’s approach combines fundamental analysis and top-down research with an aim to manage downside risk. Analysts are responsible for setting three-, six-, and 12-month targets for local rates positions, and the team actively trades around currency positions. There is evaluation of interest rates and currencies on a country-by-country basis, and its higher-conviction positions aren’t usually more than a few percentage points off the JPMorgan GBI-Emerging Markets Global Diversified Index’s, a sensible guardrail given the exchange-rate volatility inherent here. 

In addition, it isn’t typically, complete avoid an index constituent, either taking a small position in that country’s rates or currency, which makes sense given the small number of names (roughly 20) in the sovereign bond benchmark. The strategy also allows up to 20% in U.S.-dollar-denominated debt and cash. Still, the process allows plenty of room to manoeuvre. When it’s found that emerging-markets currencies are extremely undervalued, it can take that exposure up to 125%, and when they are expensive it can hedge it to 75%. The portfolio is further diversified by off-index plays, which have included frontier markets (Egypt) and developed markets (Greece). 

Portfolio

The process allows for ample movement in the strategy’s overall emerging-markets currency exposure, which has been dialled up and down in a tactical fashion based on valuations and its market outlook. The portfolio’s overall emerging-markets currency exposure was light (around 75% of assets) following 2012’s big market runup, which served the strategy well when things got tough in 2013. The managers brought that exposure up to the 90% range at the end of the sell-off in 2015 and then let it run in the 110%-120% range as it rallied in 2016 and 2017. Since the pandemic-riled markets in February 2020, the team has kept the portfolio’s overall emerging-markets currency exposure between 93% and 100%, given it has been concerned about U.S. dollar strength. The strategy sticks close to the benchmark, but at times its high-conviction and tactical nature is on full display. In 2020, the team was overweight in longer Brazilian debt based on valuations and favorable real rates, which hurt early on during that year. But off-benchmark moves have helped combat the concentration risk associated with this bogy. The portfolio’s positioning in Egypt was a prime example in 2020: That stake sat at 5% to start the year, and the team cut it completely by the end of March to redeploy to more attractively priced opportunities before building it back to 4% at the end of September. As of September 2021, the team continued to hold a 4% stake in local Egyptian debt given its attractive yield and pending inclusion into the JPMorgan GBI-Emerging Markets Global Diversified Index.

People

This remains one of the more-experienced teams that works well together, but its size hasn’t kept pace with some larger peers. This underpins its People Pillar downgrade to Above Average from High.

Emerging-markets bond veterans Penny Foley and David Robbins took over here in December 2009. Foley cofounded an institutional emerging-markets debt and equity strategy in 1987; Robbins joined her there in 2000 after running emerging-markets trading at Lehman Brothers and Morgan Stanley. Alex Stanojevic, a trader with the team since 2005, was named comanager in mid-2017, helping build ample transition time for when Foley eventually retires. 

The managers’ supporting cast is experienced and works together well, but it’s half the size of some peers, which can leave the team stretched in an ever-expanding investment universe. The managers are supported by five sovereign analysts led by Blaise Antin, who joined TCW in 2000. Longtime team member Javier Segovia leads a group of three emerging-markets corporate analysts including Stephen Keck, who has focused on this sector for TCW since 2003, and two more experienced analysts who joined in 2011 and 2015. This corporate cast, while experienced, is much leaner than some peers. Additionally, their relative inexperience with Asian corporate credit was partly to blame for 2021’s disappointing performance. As the emerging-markets debt market grows, this midsized team will need to stick to what it knows best to maintain its edge.

Performance 

This strategy’s Institutional share class gained 0.6% annualized from its mid-December 2010 inception through December 2021, ranking third out of 14 distinct strategies in the emerging-markets local-currency bond Morningstar Category. It also outpaced the JPMorgan GBI-Emerging Markets Global Diversified Index by roughly 10 basis points annualized. Though the strategy isn’t likely to reach the heights of its more aggressive competitors in strong rallies, it’s been no slouch. It edged out its typical peer and benchmark in 2016 and 2017, for example, through smart positioning with larger index constituents such as Brazil and Russia, as well as picking out-of-benchmark winners such as the Indian rupee and Egyptian pound. The strategy has held up better than peers and the index in some tough markets thanks to the team’s valuation discipline and smart allocation moves. Taking emerging-markets currency exposure down to 75% of assets and raising cash to around 11% helped going into 2013’s taper tantrum, as did some better performing off-index investments in China and Uruguay. Still, lately there have been a few bumps in the road. The strategy’s 9.3% loss in 

2021 lagged its typical rival by 110 basis points and its benchmark by 90 basis points. Much of this underperformance owed to the team’s overweighting in emerging-markets local-currency exposure, as the U.S. dollar outperformed for most of the year. From a country perspective, an overweighting and long-duration positioning in Mexico and Columbia were painful.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

PIMCO ESG Global Bond Fund: A Fund providing exposure to core bond holding with ESG bias

The Fund provides exposure to investment grade securities from around the globe while incorporating PIMCO’s ESG screening framework. The strategy can be used as a core bond holding in client portfolios who have an ESG bias. The PIMCO Global Bond Fund is in attraction due to the well-resourced / experienced investment team and PIMCO’s well established investment process. PIMCO’s ESG framework involves three stages: (1) Exclude (restrictions on certain sectors). (2) Evaluate (best in class ESG issuers + prime engagement candidates). (3) Engage (engage issuers to improve ESG related business practices).

Downside Risk

  • Interest rate risk (bond prices and yields are inversely related). 
  • Credit risk (the risk of downgrades or even default) & inflation risk. 
  •  Personnel risk – significant turnover among the 3 lead PMs.

Fund Performance (As at Aug, 2021)

C:\Users\Akhila\Downloads\Screenshot 2021-12-29 144804.png

Investment Process

PIMCO applies a wide range of strategies including Duration analysis, Credit analysis, Relative Value analysis, Sector Allocation and Rotation and individual security selection. The Manger looks to make active decisions with a long-term focus and avoid extreme swings in duration or maturity with a view to creating a steady stream of returns. The Manager has designed and structured a global investment process that includes both top-down and bottom-up decision-making. The first and most important step in the firm’s process is to get the long-term view correct. The figure below provides a summary of the key elements in the investment process.

C:\Users\Akhila\Downloads\Screenshot 2021-12-29 145011.png

Secular analysis: The Manager considers its secular analysis as critical to the investment process, with the firm devoting three days every year to a “Secular Forum”. At this forum, the firm formulates PIMCO’s outlook for global bond markets over the next three to five years. Selected members of the investment staff are assigned secular topics to monitor, including monetary and fiscal policy, inflation, demographics, technology, productivity trends, and global trade. Secular researchers tackle their subjects on a global basis and approach them over a multi-year horizon. At the forum the researchers present their findings to all of the firm’s investment professionals. 

Decision making: Post Secular and Economic Forums, the Investment Committee (senior portfolio managers) develop major strategies that serve as a model for all portfolios using a consensus-based approach. The IC utilises top-down analysis provided by the forums as well as bottom-up input from specialists who focus on various fixed income sectors and the regional portfolio committees. The Investment Committee sets targets for portfolio characteristics such as duration, yield curve exposure, convexity, sector concentration and credit quality and ensures themes are consistently applied across all portfolios. The portfolio management group including the PIMCO Global Strategy team, through the incorporation of the Investment Committee’s model portfolio characteristics, will then construct the Fund.

About the fund

 The ESG Global Bond Fund is an actively managed portfolio of global fixed interest investment which incorporates PIMCO’s ESG screening. The portfolio predominantly invests in governments, corporate, mortgage and other global fixed interest securities.

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Sectors

Bentham Professional Global Income Fund: Strong Multi-strategy Credit Approach

Fund Objective

The Fund aims to provide exposure to global credit markets and to generate income with some potential for capital growth over the medium to long term. The Fund aims to outperform its composite benchmark over the suggested minimum investment timeframe.

Fund Strategy

The Fund is actively managed and focused on generating stable investment income by providing a diversified exposure to domestic and global credit markets while managing interest rate risk and currency risk. Bentham seeks to add value through actively managing asset allocations across different credit sectors, trading individual securities and managing its interest rate and currency risk. Bentham manages the Fund on a top-down basis.

Approach

Bentham Global Income holds a range of investments, including Australian and global hybrids, high-yield debt, investment-grade credit, collateralised loan obligations, and cash. Although not currently utilized, Aberdeen Asset Management manages a European convertible component from London. At least 50% of securities must be investment-grade, while Bentham can short credit to a maximum of 35%. Duration is actively managed and usually below the Bloomberg Ausbond Composite Bond Index; it may even be negative. Bentham’s investment in risk-monitoring systems is important in keeping tabs on the array of complex instruments held and the resulting credit and currency exposures.

Portfolio 

The strategy offers a diverse range of fixed-interest asset classes, with the asset mix varying greatly since inception. Syndicated loans (42%), cash (14%), CLOs (12%), and bank capital securities (16%) were the four largest allocations as of October 2021. Capital securities and corporate investment-grade were the largest gainers over the past year at 3.1% and 4.7%, respectively. 

Portfolio Bentham.png

People 

Encouragingly, Bentham retains a formal connection to Credit Suisse’s Credit Investments Group, one of the most deeply resourced groups in the market. This provides welcome global information sharing and asset selection, especially in the loan space. Nik Persic is the other key person and now has 16 years of working with Quin after joining Credit Suisse in 2005 from Commonwealth Bank of Australia, where he held roles in equity capital markets and institutional research.

Performance

Long-term performance has been excellent, despite the contrarian duration positioning in 2014-16. A prolonged negative duration call was an anchor on performance before Bentham aggressively reversed it during 2019. The year 2020 has enabled the team to highlight its flexibility, rotating its portfolio significantly whilst also trading high levels of credit default swap hedges–an almost 2% contribution. Synthetic credit delivered a similar benefit. Loans unsurprisingly have been the backbone of the strategy, delivering solid long-term performance with almost all physical credit being additive over three, five, and seven years.

Bentham Performance .png

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

Fidelity Government Income Fund: An appealing Government-focused offering

A blended benchmark of the Bloomberg U.S Government Bond Index (75% weighting) and the Bloomberg U.S Mortgage Backed Securities Index (25%), sticks primarily to government-backed fare (Outside of an occasional in the student loan-backed debt that carries a federal guarantee for atleast 97% of principal and interest) and doesn’t make big interest-rate bets. It plays to its strength in the mortgage portion of the portfolio, which typically accounts for 40% to 60% of assets, drawing on significant investments in proprietary analytics to identify mortgages with more attractive cash flow projections than their prices suggest. As of June 2021, the strategy’s market exposure stood roughly 107% of net assets.

Portfolio

The high-quality, government-focused portfolio tends to hold an overweighting in mortgages relative to its blended benchmark (75% Bloomberg U.S Government Bond Index and 25% Bloomberg U.S Mortgage backed Securities Index), with the team actively adjusting this mix based on valuations. Meanwhile, its allocation to U.S Treasuries accounted for 67% of assets in June 2021, up from 50% at the beginning of 2020. Here, the team favors 30-year fixed rate mortgage with repayment-resistant characteristics. The team has found agency collateralized mortgage obligations to be less attractive recently, trimming its stake to 9% of assets as of June 2021 from 14% at the start of 2020. These securities can be volatile and suffer from bouts of illiquidity, although they typically account for 3% or less of the portfolio and stood at less than 1% as of June 2021.

People

This strategy benefits from experienced leadership and a well-resourced securitized team, supporting a people pillar rating of above average. Sean Corcoran was named as a comanger when lrving left the team. Corcoran, a 19 – year fidelity veteran, previously analyzed commercial MBS and other non-agency fare as an analyst. Corcoran and castagliuolo draw on considerable resources, including eight dedicated structured-products analysts and five macro analysts. Five traders across agency, non-agency and rates markets support the team. In mid-2020, the team hired John Torregrossa, an experienced agency MBS trader with over 15 years experience, to replace veteran trader Steve Langan, who retired in late 2020.

Performance 

Well time adjustments have aided recent performance. In 2019, an increase in its Treasuries allocation helped it to a 6.5% return which bested 75% of category peers. In 2020, the team increased its exposure to mortgages amid the first quarter sell-off, helping the strategy to a 6.9% return, which bested over two thirds of peers.

FGOVX Performance.png

About the Fund

Fidelity Government Income Benefits from a well-resourced team and risk-conscious approach backed by the firms’s deep mortgage analytics. Fidelity’s significant investment in analytics, including a proprietary mortgage model that allows the team to quickly model changes in assumptions regarding borrower repayment behavior to identify mispricings in the mortgage market. 

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

Janus Henderson Tactical Income Fund: An absolute return fund aiming to outperform benchmark

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

that makes tactical asset allocation decisions between cash, duration, and higher yielding investments to produce returns in both rising and sliding bond yield environments.. The strategy aims to outperform the Benchmark in terms of net total return over rolling three-year periods by investing primarily in Australian fixed income securities.

Investment Philosophy + Process:

The Manager believes that taking a flexible approach to asset allocation allows the team to better manage fixed interest exposure and enhance returns depending on market.

The Fund’s investment and portfolio construction process consists of:

Stage 1: Strategy Formulation: The team ranks the active duration and credit positions of their core Australian Fixed Interest Income strategy. 

Stage 2: Risk Calibration: Determine asset allocation using the ranking. 

Stage 3: Implementation: Invest in range of cash, fixed interest and higher yielding securities, based on investments decisions from the following:

  • Interest rates: (holding longer duration securities versus shorter-dated paper).
  • Sectors:  (government securities versus non-government given the risk premium).
  • Securities: (given the underlying risk/reward, select appropriate non-government securities). 

Portfolio Characteristics:

Portfolio Characteristics                              Details
Benchmark50% Bloomberg Composite 0 + 50% Bloomberg Bank Bill
Alpa target p.a.n.m (pree –fees)1.0%
Minimum suggested time frame3 years
Alpha source30% Rates + 30% Sector / Security selection + 40% Asset Allocation
Minimum weighted average credit qualityBBB

(Source: Janus Henderson)

Investment team:

The Janus Henderson Australian fixed interest team, headed by Jay Sivapalan, is highly experienced and well resourced. 

The environmental, social, and governance (ESG) factors are factored into the credit decision-making process. The Manager adheres to the “quality before price” attitude, and hence considers ESG factors to be critical in their four-pillar bottom-up credit analysis. The four pillars are as follows:

  • Competitive Advantage and Industry Dynamics 
  • Financial Risk 
  • Management Profile 
  • ESG Risk

Asset and sector allocation:

C:\Users\Akhila\Downloads\TODAY 2.png

(Source: Janus Henders)

 Fund Performance(as of august2021:net) and current positioning:

PercentageFundBenchmarkOutperformance
1-month-0.09%0.05%-0.14%
3-month0.15%1.28%-1.13%
6-month0.74%2.11%-1.37%
1-year1.28%0.56%+0.72%
3-year (p.a.)2.60%2.68%-0.08%
5-year (p.a.)2.60%2.28%+0.32%
Inception4.72%3.93%+0.79%


(Source: Janus Henderson)

Credit Process:

C:\Users\Akhila\Downloads\credit process.png

(Source: Janus Henderson)

Downside Risks:

  • Investment strategy selection fails to yield alpha.
  • Lead PM departsor significant turnover in the broader investment team
  • Manager fails to make the right duration (short or long) call over an extended period of time. 
  • Credit and interest rate risk

Company Profile:

Janus Henderson is a worldwide asset management company with over 340 investment experts who specialise in all major asset types. Its individual, intermediary, and institutional clients come from all over the world and entrust it with over $500 billion in assets. Over the course of market cycles, Janus Henderson’s commitment to active management allows customers to outperform passive strategies. Its managers use their skills to analyse risk vs reward potential in times of both market calm and growing uncertainty, ensuring customers are on the right side of change.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.