“There was a lot of disappointment with fixed income portfolios that ended up being subject to equity-like risk, so investors now really want their bonds to behave like bonds,” Borysciewicz says. The same phenomenon is observed by the head of PIMCO’s Australian office, John Wilson, who is plainly frustrated that so many institutional investors have been indexing their bond exposure. “You have to ask yourself, in three years do you think interest rates will be higher than they are today? If you think they will be, then why are you buying a Treasuries index with an average 5.8 year duration, and guaranteeing yourself capital loss?” Wilson actually senses a rare occasion where retail investors may be thinking more progressively than the wholesale side, given it is advisers who are driving flows into PIMCO’s shortduration Australian credit portfolio, as exemplified by its Australian Focus Fund.
“Retail investors are playing in the thickest part of the yield curve, they are getting the implicit Government guarantee of paper issued by the banks, plus stable Aussie corporates like Woolies and BHP.” PIMCO’s Australian Focus Fund runs against a 1.9 year average duration benchmark . The UBS Composite benchmark’s average duration is 3.8 years, and Wilson points out “it’s going to get longer as the Government issues more paper, so as interest rates rise you’re going to endure capital loss”. AustralianSuper’s Hopper warns that manager selection is crucial for credit exposures, because “the value has been shifting so quickly between different parts of the market…think back to when bank loans were doing much better than high yield, then that turned on its head. You’ve seen high yield come back by far the strongest in this recovery, CCC securities are up 100 per cent from their lows.”
With greater cross-sectional volatility has come wider dispersion between manager performance. The difference between the top and bottom quartile of active fixed income managers has blown out from “10 to 20 bps to 10 per cent”, Macquarie’s Lethwaite says, with the biggest losers those still working through toxic high-yield and hybrid holdings that had formed part of a “30 per cent [supposedly defensive component] which began to look too much like the other 70 per cent”. Credit Agricole Asset Management’s Borysiewicz says the investors attracted to CAAM’s Global Bond Fund recognise that the volatile fixed income market demands a top-down view.
“We’re finding investors don’t want to be too narrowly focussed – for instance, it doesn’t matter if you have the best bottom-up credit manager out there, you have missed out on what the central banks and governments are doing, the market opportunities that are being created…A top-down, thematic approach will attempt to position you for what is happening in six months time, and you can get alpha from OECD bonds, currency, emerging market debt, as well as credit.” In the year to August 31 the CAAM Global Bond Fund generated a net 20.18 per cent return, against 10.05 per cent for the Barclays Capital Global Aggregate index. However true to his credo that “people want bonds to behave like bonds”, Borysiewicz is stressing that what appears a rather equity-like return was the result of the one-off dislocation in traditional fixed interest markets. “Normally to get a [20 per cent plus return] you would have to leverage or load up on junk bonds, but in 2008/09 it was simply enough for us to be short credit last year and long credit this year,” Borysiewicz says, adding there were numerous other contributors to the windfall return.
