Stuart Dear is at a famed Sydney restaurant trying not to appear too happy. The Aberdeen Asset Management portfolio manager is part of team that manages $14.5 billion in Australian bonds and is ranked number one by Morningstar.
Aberdeen’s current 11-person team has over 10 years delivered a 7.2-per-cent annual gross return, according to Morningstar’s Australian Institutional Survey.
Dear is not the only one in Australia’s fixed income community who says the moment has come for those who work in bond markets.
Matthew Johnson, the interest-rate strategist for UBS in Sydney, forecasts the Australian fixed-income market growing to $700 billion by 2015 from $200 billion in 2005.
“That’s a market that will support a higher headcount,” says Johnson.
Australia is revelling in its safe-haven status given to it by foreign investors who now own about 80 per cent of Australia’s debt. Four debt-rating agencies have given Australia their highest credit rating. The Reserve Bank is seen as running a conventional monetary policy of keeping inflation low while having room to cut rates. The budget is forecast to be in surplus.
Johnson, who has just returned to Australia from visiting Japan, says among Asia’s largest investors, including central banks and sovereign wealth funds, there is more allocation toward Australian bonds.
“We’re in a good situation at the moment,” he says.
It is not only foreign investors who have fallen in love with Australian bonds. Some forecast local investors will also allocate more of their money to fixed income after disappointment with the performance of stocks over the past four years.
Last week iShares, a unit of the world’s biggest asset manager BlackRock, listed three bond exchange-traded funds (ETFs) on the Australian stock market. Mark Oliver, an iShares managing director, expects the market value of the three funds to grow to $4 billion from $70 million, their value after the first day of trading.
iShares currently employs 15 people. “We’ll add to that as we see the need to,” says Oliver.
Still, costs of a fixed-income investing or broking team are much higher compared with a similar group that invests in stocks.
“The infrastructure is more demanding” for bonds, says Dear.
Bond trading and investing have complex settlement requirements, risk management systems while fees garnered are lower.
“There is a higher fixed-cost base and lower revenue per funds under management,” says Dear.
Oliver hopes that his ETFs can lower costs. In the US, investment grade ETFs now have a bid-offer spread of 1 basis point compared with 35 basis points before ETFs were launched. High-yield spreads have gone to 2 basis points from 200.
iShares spent three years negotiating with the Australian Securities and Investments Commission and the ASX Group to list its ETFs in Australia.