A report from Zenith has found that the AFI bonds sub-sector produced a net return of 7.2 per cent and, in absolute terms, returns across the sector were large in a historical context.
The report also noted structural ‘short bias’ across the bonds sub-sector as well as overweight credit positioning, particularly to the sell-off in risk assets in 4Q18.
However, when key positions were detracted from performance, there were different outcomes for ‘core’ and ‘core-plus’ offerings, with the former tending to produce more consistent risk-adjusted returns as active risk was generally expressed in a local context with more sensitivity to the benchmark.
“AFI Bond managers are well positioned to navigate an environment where interest rate cuts are already priced into forward curves and deteriorating macroeconomic fundamentals have the potential to impact the credit cycle,’ Zenith’s head of multi-asset and Australian fixed income, Andrew Yap said.
“In our opinion, through this period of transition, active AFI managers should produce superior risk adjusted-returns and demonstrate greater capital preservation qualities relative to passive investment approaches.
“That said, investors should expect that in a market where volatility rises, a greater dispersion of performance outcomes across the asset class, reflecting differences in investment styles, focus and the ability of managers to extract value given prevailing market conditions.”
According to Yap, the bonds might continue to rally and the longer-term prospects of AFI bond managers would be expected to be closely aligned to their breadth of mandate and propensity to take active risk in the areas of interest rates and bottom-up credit selection.