Andrew Yap

Global Fixed Income managers have been challenged to navigate an ever volatile investment landscape due to divergent central bank policy and dislocations in global high yield, according to Andrew Yap, Zenith Investment Partners Head of Multi-Asset & Income Research on the Global Fixed Income Sector Review that was released last week.

Commenting further, Andrew Yap said that despite the research house observing a broad range of outcomes across their rated universe of GFI managers, Zenith believes opportunities still exist for investment managers to outperform traditional fixed interest benchmarks through the use of active strategies that span rates, curve, sector rotation, and credit.

“Zenith highlights two recurring themes which shaped the outcomes of many sector participants; a divergence in global monetary policy, and dislocations in high yield. With regard to the former, GFI managers sited difficulties in correctly forecasting the U.S. and European interest rate cycles, with many positioned for a rising rate environment and further normalisation in the global term structure”, explained Andrew Yap.

These views were commonly enacted through negative or low duration strategies, relative to traditional fixed interest benchmarks, which contributed to underperformance.

“Many sector participants also retained a meaningful allocation to the high yield sector, believing an improving US economy would be the catalyst for further compression in credit spreads”, said Andrew Yap. “However, in the wake of a ‘free fall’ in crude oil, an abrupt and significant widening in credit spreads produced material losses in high-yield, with the troubled commodity-related sector faring the worst.

“An increased use of portfolio protection and tail hedging strategies has also occurred, in a bid to combat the recent resurgence in market volatility. Zenith believes these strategies can enhance portfolio outcomes by guarding against capital losses. However, such strategies are not without a cost and must be analysed sufficiently as there may be instances where they perform in a manner inconsistent with the intended purpose”.

In keeping with its high conviction approach, Zenith awarded 51 ratings across a range of categories including bonds, diversified, corporate debt, high income, unconstrained and alternative debt-strategies.

Of these funds, six were upgraded, two downgraded and coverage was initiated on a further six.

Pleasingly four funds were awarded Zenith’s premier rating of ‘Highly Recommended’, with PIMCO the beneficiary of three of these, reflecting our view that its new senior leadership structure represents a stronger investment proposition, both in terms of mitigating key person risk and creating a cohesive decision-making platform.

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