Fixed income beneficial while equity earnings are low
Uncertainty over company earnings has kept fixed income an attractive option as some of the best-performing diversified credit funds generated strong returns during the pandemic.
According to FE Analytics, within the Australian Core Strategies universe, the fixed interest diversified credit sector had an average return of 1.9% over the 12 months to 31 May, 2020.
Principal’s Global Credit Opportunities was the best performer in the sector, returning 12.34%, followed by First Sentier Investors’ CFS Wholesale Global Corporate Bond (9.44%), DirectMoney Personal Loan (7.42%), UBS Global Credit (6.82%) and Manning Private Debt (5.77%).
Principal held of 75% of its holdings in North American bonds, with its biggest holdings by investment in global investment grade credit (41.48%), government debt (24.6%) and global high yield (12.75%).
Darryl Trunnel, Principal Global Investors portfolio managers, said there was a lot of uncertainty as to how long it would take for economic activity to return to the levels it was before.
“With that heightened uncertainty and added volatility, I think there’s a lot more concern about earnings for companies in particular,” Trunnel said.
But there had been a lot of opportunities for fixed income because spreads to risk-free rates for credit had varied widely.
“Being an opportunistic strategy allows us to move in and out of that risk, our fund tries to deliver high yield like returns but with investment grade volatility and we also try and limit the downside to manage the volatility,” Trunnel said.
“We moved in January and February to having a lot of government securities and treasuries, and reduced our credit exposure.
“That’s probably the biggest asset allocation move that we made out of risk assets into risk free ones in the entire time we’ve been managing this fund.”
Best performing fixed income diversified credit funds over one year to 31 May 2020
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