Unconstrained sub-category for fixed income

Ratings house Zenith has created a new “unconstrained” fixed interest sub-category in its 2014 Global Fixed Interest Sector Report released this week. 

The move comes as fund managers are offering or are about to offer a growing number of new funds to the market, aimed at fulfilling perceived current or future fixed interest needs of investors. 

“No longer will long-term rates be anchored as central banks look to remove stimulus from economies that are perceived to be recovering,” the report said. 

“The volatility becomes more prevalent in credit markets, as emerging market debt returns become more idiosyncratic, with investors discerning between countries.” 

Zenith said fund managers are creating fixed interest solutions that are better able to steer through the changing fixed income environment compared to traditional, benchmark-relative offerings. 

They have removed the link to traditional benchmarks by adopting a cash (or equivalent) benchmark. They have also relaxed or removed many constraints, especially duration, sector and country limits. 

Zenith does, however, note some risks. It said many of the strategies in this sub-category have relatively short performance histories, making it more difficult to rely on the manager’s ability to deliver on the strategy objectives over the market cycle. 

The report also noted managers have chosen a master/feeder structure to launch the funds in the Australian market, meaning it adds another layer of complexity to the offerings.