The world over it has been a particularly volatile period in fixed-interest markets.
Not least in Australia. Led by the Reserve Bank of Australia (RBA) whose cash rate rose from 4.75 per cent in November 1999 to 6.5 per cent by August 2000 and then fell dramatically to 5 per cent by April.
No fund manager expected rates to fall this low so quickly. And this is unlikely to be the end. By mid-April, following the surprise cut in US rates by the Federal Reserve, most believed the RBA will cut Australian rates still further.
In dropping rates the RBA is focused on the weaker international economic conditions led by the United States, where business and consumer confidence has weakened noticeably against the background of a rapidly falling share market. The RBA also worries that “a number of other countries, including importantly for Australia those in east Asia, have recently shown signs of slower economic growth. World interest rates are declining in response to these conditions.”
Against this background Assirt found the winning fund managers in the fixed interest arena have tended to focus on the central bank and official monetary policy setting; have been prepared to make calls that have not necessarily been the market consensus; and have processes which they stick to.
Investment styles in fixed interest have a greater homogeneity than typiucall found in equities. This makes the individual abilities of the fund manager even more important.
A trend highlighted by Assirt is the increasing importance of credit assessment capabilities. As the involvement of national governments in their bond markets tapers off – headed by the United States which has a budget surplus and is thus creating a premium for its Treasury bonds – attention has shifted to other non-government and quasi-government securities. Particularly relevant is the growth of Australia’s corporate bond market.
“Fund managers now have to have a strong corporate assessment capability in terms of credit,” says Assirt associate director Anthony Serhan.
UBS Asset Management, the winner of this year’s fixed interest class, has increased its weighting of non-government securities to 23 per cent from around 7 per cent in early1998.
Head of fixed interest Stuart Piper notes the fund had been building a long position since 1999 in anticipation of interest rates rising. This started unwinding in the latter part of last year as rates dropped.
“All along we assess what the fundamentals are telling us,” he says.
Robert Mann, chief investment officer at Credit Suisse Asset Management, runners-up in the fixed interest class, notes the year has been characterised by bonds outperforming equities.
“Typically it is the other way round,” he says.
“Credit Suisse focuses on individual securities that are mispriced. For technical reasons, the credit curve changed shape. We saw this opportunity.”
IOOF-Perennial Investment Partners comes third in the fixed-interest category that Assirt ranked from 13 eligible managers.
Glenn Feben, head of fixed interest, says the group’s investment approach is framed around the view that “markets do move away from what we assess to be fair value for a period of time. Our framework thus tries to assess fair value.”
Feben says this is based on two factors. First, taking a view on the economic outlook and anticipating what the effect will be on monetary policy. Second, developing a series of measures to evaluate value.
“As active managers, we have to rely on judgment to balance the two,” he says.
By way of example he notes that at the end of last year “on our valuations we were defensive prematurely. This initially hurt but we stuck to our process which has subsequently been vindicated.”
Australian Fixed Interest
UBS Asset Management
Credit Suisse Asset Management
IOOF
