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Fixed Income

Active fixed income key going forward

The latest Zenith Investment Partners review into the Australian fixed interest sector has concluded managers employing a range of strategies are most likely to produce the best returns.

A key reason behind this deduction is the changing composition of the common benchmark used, the Bloomberg AusBond Composite Bond Index, with its heavier weighting toward government bonds.

Zenith head of income and multi-asset research Andrew Yap said the increased dominance of the government component of the benchmark has resulted in a material lengthening of duration, a trend the research house believes may continue over the near to medium term, as Treasury increases its issuance of sovereign bonds to aid with the funding of the government’s fiscal program.

“As the government component continues to increase, the corporate segment has fallen as a percentage of the benchmark – in June 2007, corporates represented 36 per cent of the benchmark and at the end of May 2017 that number had declined to approximately 10 per cent. This structural decline in corporate credit has been matched with an equally sizeable fall in the benchmark’s running yield,” Yap said.

“The changing composition of the benchmark has two implications – firstly, Australian fixed interest managers will need to become more proficient in the use of active interest rate strategies and, secondly, it will become more difficult for credit to be the ‘heavy lifter’ of investment returns.”

As a result, Zenith does not believe credit will be as significant a contributor to portfolio outcomes as has been in the case in past years.

Zenith’s “2017 Australian Fixed Interest Sector Review” analysed an initial universe of 95 products.

Four were rated highly recommended, 24 were rated recommended, 11 were rated approved, three were rated under review, and 52 were not rated.

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