Active Australian fixed income continues to deliver attractive risk-adjusted returns
The resurgence of fixed income’s defensive characteristics is acutely apparent. Less obvious, but no less important is the role that active management can play in navigating rapidly evolving market conditions effectively and defending against poor portfolio outcomes.
Jonathan Costello, Client Service Executive at Western Asset, a global fixed income manager, says “Within fixed income markets, behavioural and structural inefficiencies exist that present opportunities for active managers to enhance returns. Various pitfalls of investing passively can also serve to increase risk, underscoring the importance of addressing these via active approaches to ensure fixed income’s defensive profile delivers to the best extent possible.”
The composition of the Australian fixed income market has changed dramatically over the past two decades. Whilst corporate debt outstanding has grown modestly, the sheer weight of Government and Semi-Government issuance has dwarfed corporate issuance and crowded out credit in the benchmark.
Costello adds “A similar outcome has transpired for the Supranational sector. Lower sector diversification, reduced exposure to credit and changes to the risk attributes of the index are the result.
“Passive investors have inherited lower corporate exposure and thus less yield buffer. In an investment grade dominated, high quality market, that additional yield buffer has proven to be a valuable tool against the negative impacts of rising rates, with a negligible increase in default risk.
“Increasing weights to these high-quality corporates without significantly increasing the risk of the portfolio, nor decreasing the average quality is possible through active management. Active managers can also position appropriately to maintain the attributes that investors are seeking in a core fixed income allocation; liquidity, defensive yield, correlation benefits and portfolio diversification.”
Recent data highlights the success that active managers have had within Australian Fixed Income
As shown in an S&P study, active management has been rewarded more often than not, over one and five-year periods. The report underscores active management’s success within Australian Fixed Income when viewed against other asset classes in which most managers have underperformed their benchmarks over 1, 3 and 5 year periods.
Source: S&P SPIVA Scorecard, Western Asset
“At Western Asset, we are confident that a consistent and time-honed process for identifying and exploiting the structural and behavioural inefficiencies of the market, offer risk-adjusted return enhancement opportunities that can deliver persistent outperformance for years to come,” notes Costello.
