Diverging from the benchmark

A ‘once in a decade’ opportunity for active managers in fixed interest helped the Janus Henderson Australian Fixed Interest fund claim victory at this year’s Money Management Fund Manager of the Year awards.

Winning the category of Australian fixed interest, Janus Henderson said the fund took the opportunity to act on market dislocations that had been created.

Manager and head of Australian fixed interest, Jay Sivapalan, who had run the fund since 2015, said the fund had taken an approach which was “quite different” to that of its

Bloomberg AusBond Composite 0+ Year Index benchmark. While the benchmark had 57% allocated to government bonds, the fund had just 12% and instead had 54% allocation to credit.

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“[We are] actively seeking opportunities for higher yields and managing duration (interest rate risk) to preserve capital and enhance returns,” he said.

“2020 created a once-in-a-decade opportunity for active investors to outperform should they have acted on the many dislocations available throughout the year.

“With the cash rate falling to an all-time low of 0.1% and bond yields dropping below 1%, returns mostly came from capital movements.”

Successful strategies implemented by Sivapalan last year included active duration management, sizeable positions in inflation-linked bonds, overweight assets in low-risk assets such as semi-government bonds and taking advantage of wide spreads in recession-proof credits.

Many investors were currently concerned about rising bond yields and the threat of rising inflation but Sivapalan said this would create better value for the asset class. 

A higher bond yield when rates were near zero would present a steep yield curve which would give investors the opportunity to participate in the yield and the roll-down effect, he said.

“This year is shaping up to be one where active interest rate strategies, including taking advantage of higher yields, may overshadow excess returns from spread sectors,” he said.

“Accordingly, our strategies will emphasise this from time to time as prevailing market conditions offer investment opportunities. 

“While we expect some volatility and drawdown, near-term volatility presents an opportunity for active managers. Ultimately, higher bond yields restore the defensive characteristics and create better value for the asset class.”