Fixed Income

Bond benchmark hides opportunities

fixed income benchmark

The benchmark for fixed income investment performance is very narrow and obscures other opportunities open to investors.

Investors looking at fixed income investments, such as bonds, may want to look past the commonly used benchmark, which is limited in its coverage, according to an asset consultant and investment advice firm.

Atchison Consultants principal Kevin Toohey said interest in fixed income had returned due to the economic and political events of 2022, but the reversal of recent gains in long-duration bonds and an increase in credit spreads have made it difficult to apply a broad approach to its use for the defensive part of a portfolio.

Toohey noted the composition of the Bloomberg AusBond Composite Index, against which most Australian fixed income investments are benchmarked, was limited and “only includes eight sectors of the fixed income market, including federal and state government and then into corporate and some fixed-rate residential mortgage-backed securities (RMBS).”

“It explicitly excludes floating-rate RMBS, anything below investment grade, along with the extensive range of other asset-backed options that make up a substantial portion of the Australian debt market,” he explained.

“The result is that the AusBond Composite only measures a slice of the debt market universe.”

He said this limitation was the result of the Your Future, Your Super legislation, which imposes performance tests on Australian Prudential Regulation Authority-regulated superannuation funds, causing those funds to peg their debt exposures against the AusBond Composite Index universe.

There were other fixed income options available outside of the benchmark, in many cases via financial advisers, and investors should understand and monitor the key differences between a portfolio and the benchmark, he suggested.

As such, they should manage their fixed income weightings or at least be aware of where the drivers of performance are coming from.

“It is about understanding the limiting nature of the benchmark and seeking opportunities to leverage this where appropriate,” Toohey said.

“Using the AusBond Composite benchmark to measure performance of debt markets is like only using the election result of Queensland to call the federal election.”


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