Andrew Yap
The Australian Fixed Interest sector was not immune from the effects of the COVID-19 crisis with the median manager in Zenith Investment Partners’ Australian Fixed Interest (AFI) category producing a net return of 5.46%, for the 12 months to 30 April 2020 trailing the Bloomberg AusBond Composite Index (0+ Years) by 0.96%
According to Zenith’s latest sector report, for the second consecutive year, absolute returns were strong across the AFI Bonds category as the Reserve Bank of Australia lowered the official cash rate from 1.50% p.a. to 0.25% and yields on Australian government securities rallied from approximately 1.70% p.a. to 0.87% p.a. (as at 30 April 2020). Credit-orientated strategies were adversely impacted by the crisis, resulting in the median manager in the Corporate Debt category returning -0.36%.
Andrew Yap, Head of Multi-Asset and Australian Fixed Income at Zenith, said it was not surprising that most of the underperformance in the 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 and unprecedented monetary policy support.
According to Yap, through the extremes of the COVID-19 market sell off, liquidity across fixed income markets was significantly impaired. Consequently, 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,” said Yap.
“The lack of liquidity in domestic and global fixed income markets through the COVID-19 crisis was a major challenge for fund managers, as they sought to balance rapidly declining bond prices, mark-to-mark losses and fund outflows, with highly attractive buying opportunities.
“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.”
Zenith’s research found that the AFI – Corporate Debt universe experienced the largest increase in buy/sell spreads, rapidly moving from 0.09% to 0.88%, with the highest being 1.72%. The AFI – Bonds universe experienced more modest increases with the average increasing from 0.09% to 0.58%.
However, despite the extremes of COVID-19, Yap believes that there remain opportunities for active managers to outperform. This is likely to be most evident 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.”
A copy of the condensed sector report can be found here.