Download Global Asset Class: Cash and Fixed Interest

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?