In an investor note, head of fixed income, Australia, Kellie Wood, said the fund management firm previously preferred to hold credit over government bonds where it had seen strong performance.
However, it has now opted to rotate its portfolio after Australian investment grade credit and subordinated debt saw strong performance.
She said: “Over the last month, swap spreads in Australia contracted and drove strong performance across both Australian investment grade credit and subordinated debt.
“More recently we have taken some risk off the table where our portfolio is looking more balanced between credit risk and interest rate risk. As the cycle progresses, we are likely to be leaning against valuations and the strong performance we have seen from credit markets and rotating into government bonds that have lagged.
“We have already started this transition, reducing exposure to expensive sectors such as US investment grade credit and high yield into US government bonds.”
As well as in government bonds, it also sees good value in inflation-linked bonds both in the US and Australia where inflationary expectations have moved lower from high levels.
Consumer price index inflation rose 1 per cent in the June quarter and 3.8 per cent annually, according to the latest data from the Australian Bureau of Statistics. Over the quarter, the most significant price rises were housing (1.1 per cent), food and non-alcoholic beverages (1.2 per cent), clothing and footwear (3.1 per cent), and alcohol and tobacco (1.5 per cent).
“Owning inflation-linked bonds offer a real yield, in addition to the pass-through of future inflation. These positions also help protect against upside inflation risk which is now underpriced in markets,” Wood said.
Wood was appointed to her role earlier this year, after the firm announced it was merging its Australian fixed income and multi-asset teams in May. This saw Sebastian Mullins move from head of multi-asset into leading the combined team as head of multi-asset and fixed income, while Wood became the head of fixed income.
Stuart Dear, head of Australian fixed income, departed the firm after 11 years, having joined Schroders in 2012 from his role as senior portfolio manager at abrdn.
