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Download Global Asset Class: Cash and Fixed Interest
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Global Asset Class: Cash and Fixed Interest Tim Gardener – Head of Institutional Client Strategy, AXA Investment Managers Jon Glass – CIO, Media Super Rob Hogg – Senior Consultant, Frontier Advisors Murray Davis (Chair) – Treasury Manager, ME Bank Cash and Fixed Interest Returns Sector Quarter (%) 1 Year (%) 3 Years (%) 5 Years 10 Years 20 Years (%) (%) (%) Australian Bonds - Sovereign - Composite International Bonds - Sovereign Hedged - Sovereign Unhedged -0.6 -0.3 2.3 3.3 7.1 7.0 7.4 7.6 6.1 6.3 6.8 7.0 -1.7 12.7 3.7 12.5 7.0 2.2 8.2 4.2 7.5 1.8 8.0 4.3 - Aggregated Hedged -1.9 3.5 7.4 8.7 7.7 8.1 - Credit Hedged -2.5 5.6 9.5 10.1 8.4 n/a Cash Currency - $A/$US = 0.9037 CPI 0.7 3.2 4.3 4.4 5.3 5.5 -12.8 0.4 -14.1 2.4 0.2 2.4 -0.9 2.3 3.3 2.7 1.4 2.7 Source: Bloomberg, DataStream Rolling 3 Year Returns – Bonds and Bills 20 18 16 14 12 10 8 6 4 2 0 -2 89 91 93 95 97 Bank Bills Source: DataStream 99 01 03 Government Bonds 05 07 CPI 09 11 13 Trends in Bond and Bank Bill Yields 22 18 14 10 6 2 -2 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 Source: DataStream 10 Year Aus. Govt. Yield 90 Day Bank Bill Yield CPI Composition of Fixed Interest Returns 25% 20% 15% 10% 5% 0% -5% -10% -15% 81 83 85 87 89 91 93 Capital Return Source: Schroders, Frontier 95 97 Coupon Return 99 01 03 Total Return 05 07 09 11 13 YTD Current Pricing - Sovereign Bonds still Appear Expensive Disaggregating the US 10 Year Bond Yield Source: DataStream • Sovereign bonds still appear expensive, primarily because “real” yields are so low The Fixed Interest Configuration Core position of equal allocations to Australian and international fixed interest: – Passive, downside protection and liquidity focus – Ability to invest up to 40% in active management “Alternative Defensive” allocation: – – – – Floating Rate Debt (bank loans, infrastructure debt) Total Return strategies Multi-sector credit specialist Other credit opportunities (inv. grade, high yield, EMD) Current Positioning Underweight bonds (10% versus 15%) – Generally broad based index Allocation to floating rate debt (c5%) – Bank loans, infrastructure & property debt – duration protection Neutral allocation to cash (c3%) – overall portfolio balance – some clients higher Current Issues and Concerns Government bonds yields historically low – Any downside protection? – High possibility of capital losses – “Expensive Defensives” Credit markets – Low spreads – Lower absolute returns – Multi-sector credit funds Current Issues and Concerns Bank Loans – – – – – Limited downside protection Spreads contracted Covenant lite loans and flows Still relatively attractive, but emerging concerns Active management Infrastructure & property debt – Illiquid – Pricing less attractive Retirement Phase Applications Market Dynamics What has changed in the last 6 years? – – – – CDOs and CLOs Repo markets Inventories ETFs Market Dynamics What are investors looking for? – – – – Yield Retirement products Lower fees, lower turnover Barbell structures?