Traditional bond funds were the frontrunner in 2014 leaving its credit intensive equivalent behind, according to Lonsec's Fixed Interest Sector Review.
The review found contrasting results between 2013 and 2014, with Australian fixed interest managers facing a tough ride in 2014 after a robust 2013, while global fixed interest saw a robust year within the fixed income space, with seven out of 10 managers beating the Lonsec benchmark.
Lonsec senior investment analyst for managed funds Libby Newman said 2014 was a contrast to 2013 and managers that were able to adapt thrived.
"Fixed income investing has been rewarding for a generation and has served investors well as a ballast for growth assets," Newman said.
"However, what worked in the past seems less suitable for the world ahead – be it a Japanese-style sustained low bond yield or a reversal of the 20 year bond rally."
The consequence of this change has been the rise of the unconstrained or absolute return bond funds.
"The real appeal lies in the ability of unconstrained funds to deliver investor nirvana – a positive return when yields rise, mostly by being short duration and long credit risk; but also being long duration when yields fall – as they invariably do in risk off periods, 2014 has been testament to that."
On the other hand Australian fixed income outperformed benchmark over the longer term (three, five, seven years) with lower volatility.
Newman warned advisers various regulatory changes since the global financial crisis will impact market liquidity.
