Fixed interest managers look to overseas income

A new research report compiled by van Eyk has revealed Australian income fund managers are increasingly looking to boost their risk/return profiles through the combination of domestic credit exposure with a variety of global income sectors.

The move from fixed interest managers to adopt these diversified income strategies has come about as a result of the limited opportunities to improve returns the high quality domestic credit market has been able to offer.

“Traditional income managers have had to look offshore for return enhancements because the high quality nature of the domestic credit market constrains their opportunity for generating competitive returns through stock selection and sector allocation,” van Eyk head of research and ratings Suzanne Tavill said.

With noticeable investor demand for better income producing techniques, the research house believes the rise in diversified income funds is a good development.

“There is evident demand for income-generating strategies with post-fee income levels competitive at least to what has historically been offered by mortgage funds and to ‘cash-plus’ offerings. So we see the emergence of diversified income funds as a positive for the industry,” Tavill said.

Van Eyk feels conservative investors looking for improved yield with low risk are most suitable for diversified income funds and recommends this type of investor use up to 40 per cent of their portfolio’s fixed interest allocation employing these strategies.

The research report came about through van Eyk’s desire to identify strategies that were delivering above cash rate income.

The analysis examined six diversified income managers offering pre-fee returns of 2 per cent above the cash rate with volatility levels below bonds as well as low duration risk.