Lack of liquidity hit FI investors in March quarter

The lack of liquidity in both domestic and fixed income (FI) markets through the COVID-19 crisis was the biggest challenge for fund managers as they attempted to balance declining bond prices and fund outflows with attractive buying opportunities, according to Zenith Investment Partners. 

The firm’s study found that the underperformance across the Australian fixed interest sector was experienced during the March 2020 quarter, as the full effects of the COVID-19 downturn were absorbed by the market and managers navigated a period of extreme interest rate volatility. 

Even though absolute returns were strong across the AFI Bonds category as the Reserve Bank of Australia (RBA) lowered the official cash rate from 1.5% to 0.25% and yields on Australian government securities rallied from approximately 1.70% to 0.87% (as at 30 April 2020), the credit-orientated strategies were adversely impacted by the crisis, resulting in the median manager in the Corporate Debt category returning -0.36%, the study revealed. 

Andrew Yap, head of multi-asset and Australian fixed income at Zenith, said that because liquidity across fixed income markets was significantly impaired during the market sell-off, many managers increased their bid-offer spreads to account for the costs of transacting their portfolios. 

“We observed a lack of uniformity when it came to adjusting sell spreads,” he said. 

“During these periods, the ability of investors to buy and sell bonds is reduced, resulting in higher transaction costs or bid-offer spreads. Investors and their advisers have needed to be extra-vigilant to these moves in considering portfolio changes.” 

However, despite the extremes of COVID-19, Yap said that there were still opportunities for active managers to outperform, in particular for those managers with a demonstrated track record in yield-curve and sector rotation strategies.  

“That said, asset class returns are likely to be constrained, reflecting the unintended consequences of significant fiscal stimulus packages and quantitative easing.”