AustralianSuper and the Catholic Superannuation and Retirement Fund (CSRF) have distributed $150 million between them in new money to fixed income boutique Kapstream Capital, while the manager acts on its current preference for cash over bonds.

While CSRF allocated to Kapstream in November, AustralianSuper funded Kapstream in the first week of this month. The mandates bring the absolute return-focused boutique’s funds under management to $350 million. According to Nick Maroutsos, Kapstream director, the absolute return manager recently entered “capital preservation mode”, shying away from credit and increasing its exposure to cash and cash-like securities as liquidity continues to seize up. “Cash is outperforming bonds; we’re bearish on credit.” Maroutsos said that funneling greater portions of capital into cash “gives people good diversification against bonds…we invest in bonds, but we want to give cash-like returns first and then look for alpha.” He said the boutique would wait until credit conditions improved significantly before returning to the asset class. “We don’t want to be the first ones to step in front of a freight train.” Recent kapstream research has concluded that fixed income returns will continue to underperform the cash rate set by the Reserve Bank of Australia (RBA) and that investors in bonds face an unrewarding near future. The research stated that bond investors are not being rewarded for lengthening duration or “moving out the curve”, and this run of play would continue unless cash rates drop and yield curves steepen (Kapstream pointed out that the Australian yield curve is inverted by nearly 50 basis points). The research stated that an RBA interest rate of 7.25 per cent “would be the demise of fixed income”, but that Kapstream expected the rate to not pass 7 per cent and that once it had reached this level, it would not lift for another year. It advised investors to look for managers which aim to achieve a high water mark equivalent to the cash rate and then add additional alpha. In addition, the beta and alpha components within a portfolio should be “isolated, differentiated, and re-evaluated”.

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