Managers favour short position: S&P

A short duration bias was a major driver of returns in 2010, according to a report by Standard & Poor’s.

The S&P Australian Fixed Interest Sector Report found that managers held this short position in a trading environment where bond prices actually lifted as investors worried over rising European sovereign debts.

“For those [who] maintained their short position, the market eventually came back, enabling a recovery in their position,” S&P analyst David Erdonmez (pictured) said. “Earlier losses were made up through the fourth quarter when rates began to reflect a more positive economic outlook,” he explained.

With the market being overweight, credit remained a dominant theme. Active managers continued to hold less in the treasury component of the composite bond index, in favour of credit.

This trend is likely to continue, the report stated, particularly if covered bonds come online, as this would make for a targeting of AAA-rated credit quality with a spread above Government bonds.

Erdonmez cautioned that “the competitiveness of cash funds continues to be questionable” given Australian banks’ current pricing of at-call accounts and term deposits.

Despite the range of features available with cash management trusts, Erdonmez said the high fee levels meant that investors were receiving “a benchmark return minus the better part of 100 basis points for the privilege”.

The Australian Fixed Interest Sector Report, together with reports for all funds rated as part of the review, are available on S&P’s subscriber website.