Unconstrained managers relative to their traditional counterparts have improved their performance thanks to rising bond yields along with divergent policies across monetary authorities, according to Zenith.
The latest data from Zenith found for the six months ended 31 December 2016, the median manager in the Zenith global fixed interest – unconstrained universe outperformed the traditional bond universe by 3.7 per cent.
Zenith head of alternatives research, Rodney Sebire, said: “Employing an active investment style and subject to few constraints, unconstrained funds were positioned as best idea portfolios that were expected to produce a superior and more consistent set of investment outcomes relative to that of their more traditional style GFI (global fixed interest) counterparts”.
“The early return outcomes from the category were disappointing and inconsistent, given the roaming investment mandates and high quality teams typically implementing the strategies. While stretched bond valuations and collapsing term premiums provided a partial alibi, the level of investor frustration increased,” he said.
While the spike in bond yields over the last quarter of calendar 2016 led some observers to pronounce the end of the bull market in bonds, Zenith said it had a more sanguine outlook, based on the role of bonds in a diversified portfolio.
“We see the role of bonds as one which should generate consistent returns, dampen portfolio volatility, and provide downside protection during crisis periods,” Sebire said.
“While our return expectations from fixed interest assets are more muted on a forward-looking basis, the diversification properties remain intact. Global bonds have historically exhibited negative correlation to equities, particularly during periods of market stress.”
Zenith noted that a key source of value-add for GFI unconstrained managers was sector rotation.
Sebire said there was a tendency for investors to treat GFI as a homogenous asset class but there was significant embedded diversification within the asset class.
“By way of example, while all fixed interest securities have some sensitivity to interest rate movements, the extent varies and it’s not always a negative relationship. Bank loans are floating rate, sub-investment debt that typically pay monthly coupons that will adjust up with rising interest rates,” he said.
