Fixed interest managers looking for new return opportunities

Fixed interest managers have generally had a positive 12 months with many now shifting their focus to credit duration and away from interest duration according to Zenith Investment Partners. 

In its fixed interest sector report released today Zenith said many managers were short duration last year but had shifted to neutral interest rate durations as yields continued to remain low. 

As a result managers were seeing value in credit duration with Zenith noting fixed interest managers diversifying their exposure in this asset class. 

Zenith also stated that if the relationship between risk and return will continue to be maintained a narrowing of spreads would take place and managers would struggle to produce yield in their portfolios. 

As a result managers would possibly look to keep the income generating components of their portfolios by recycling funds into higher risk segments of the fixed-interest market. Zenith said these may include bank loans, high-yield and emerging market debt which it considers to be areas of extreme risk for fixed interest. 

Zenith senior investment analyst Andrew Yap stated that Zenith also noted the growth of specialist and less constrained fixed interest investments in income-focused, absolute return, and emerging market debt. 

“In general, managers across Zenith’s recommended list performed strongly, showing a greater propensity to generate alpha while constraining downside volatility,” Yap says.  

“Alpha was more commonly aided by active credit strategies that benefited from a continued narrowing in global spreads. In contrast to this, we noted a more neutral approach to duration management and at a time where inflationary pressures among developed economies remain subdued.” 

“We have noted a greater willingness from sector participants to diversify their portfolios into lower grade spread securities in an effort to enhance income generating potential. We attribute this market thematic to the coordinated effort by central authorities to maintain cash rates at historically low levels to spur global growth. This has necessitated managers reallocating capital to other market segments where an increased yield premium can be secured,” Yap said.  

In its fixed interest sector report released today Zenith said it had rated 59 fixed interest strategies with five receiving its 'Highly Recommended’, 44 assigned a 'Recommended’ rating with 10 assigned an 'Approved’ rating.