Bill Bovingdon

Research house Lonsec has awarded “Recommended” ratings to the Altius Bond Fund and the Altius Sustainable Bond Fund.

Both Funds seek to provide investors with regular income distributions while preserving capital.  The Funds have the same benchmark and investment style; however, the Altius Sustainable Bond Fund also excludes companies from its investment universe if their primary business activity involves armaments, uranium, gambling, tobacco production, pornography, alcohol production, or production or sale of thermal coal.

The “Recommended” rating indicates that ““Lonsec has strong conviction the financial product can generate risk adjusted returns in line with relevant objectives. The financial product is considered an appropriate entry point to this asset class or strategy.”

In particular, Lonsec noted as strengths “the stability and experience of the team” and that the “Investment Advisory Board (IAC) adds value and weight to macro views”.

Lonsec also said in its review that: “The Funds seek to shift between cash and Australian bonds at various times during the cycle in an effort to protect capital. This product might be suited to investors who would like to effectively outsource the decision between cash and bonds to a fixed interest specialist or as an active satellite blended with a strategic allocation to defensive assets.

“Advisers should note the Manager has significantly greater leeway in duration positioning than more benchmark aware Australian Fixed Interest funds, so at times could outperform (or underperform) either Australian Bond funds or Australian Cash funds by a significant margin depending on its positioning.”

The review also commented on Altius’s joint venture with Australian Unity Investments: “Similar to other boutique managers with institutional backing, Altius’ partnership with Australian Unity Investments provides it with a range of non-investment support services. This arrangement is beneficial for tightly run teams like Altius, allowing it to focus on core investment operations. Lonsec observes Australian Unity Investments adopts a ‘partner for life’ mentality, giving some comfort towards its commitment to the partnership.

“Despite being a boutique fund manager, Lonsec is pleased with the independent risk monitoring function performed by AUI. Lonsec believes post- trade compliance conducted by an external party can enhance the overall integrity of the process.”

Bill Bovingdon, chief executive officer of Altius, said that the rating underlines the role that bonds funds can play in investor portfolios.

“Investors continue to be concerned about how to generate yield and income in the current market environment, with volatility an ever-present issue.

“Well-managed, nimble bond funds have a useful role to play in helping create income throughout all market cycles.

“We are particularly pleased that Lonsec has recognised the flexibility of our approach to duration which is a key element of our investment philosophy,” Mr Bovingdon said.

Lonsec has also recently named the Altius Sustainable Bond Fund as a finalist in the innovation category of the Lonsec Awards.  The winners will be announced as part of the 14th Annual Super Ratings Fund of Year Award being held on the 18th of October.

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He joins existing advisory committee members Dr Don Stammer and Mr Tony Fitzgerald as well as three Altius portfolio managers.

Mr Gordon has over 30 years’ experience in the financial services and funds management industry, in Australia, the UK and Hong Kong.

He was most recently group executive at Perpetual Investments and has also held global chief investment officer roles at Fidelity International and BNPP Investment Partners in London as well as chief executive officer and chief investment officer at Schroder Investment Management in Sydney.

Mr Gordon also chairs the group investment committee of FWD Group and is a director of Total Risk Management Pty Ltd.

Bill Bovingdon, chief investment officer at Altius, said that Mr Gordon brings immense depth of global experience and knowledge to the committee.

“The role of our committee is to interrogate and thereby enrich our views on economic and financial market issues, and Michael has a broad range of expertise and understanding to draw on in this role.

“With global economies and markets continuing to deal with unprecedented challenges, having experts of Michael’s calibre providing invaluable insights to our investment process is increasingly important,” Mr Bovingdon said.

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Simon O’Connor

The Altius Sustainable Bond Fund has been accredited by the Responsible Investment Association Australasia (RIAA) and is one of the first bond funds to be certified under its responsible investment program.

RIAA is the peak industry body representing responsible and ethical investors across Australia and New Zealand. It has more than 160 members who collectively manage at least $1 trillion globally in assets under management.

Simon O’Connor, chief executive officer of RIAA, said, “RIAA’s Responsible Investment Certification Program is aimed at helping investors of all kinds navigate towards investment options and financial advice that better match their investment beliefs and personal values.

“The responsible investment sector constitutes a growing force in the finance and capital markets of Australasia. More than half of the major superannuation funds and nine of the top 10 fund managers have committed to a more responsible approach to undertaking investments.”

The Fund was launched in December 2014. It is a diversified Australian fixed interest fund focused on investing in companies which conduct their business and apply capital responsibly, giving full consideration to a range of environmental, social and governance (ESG) issues.

Bill Bovingdon, chief investment officer of Altius Asset Management, said, “In a well-diversified portfolio, investors should have an exposure to bonds, providing diversification benefits when equities are underperforming.

“Unfortunately, there are limited investment options available to investors looking for an ESG managed fixed interest investment. Often investors use bank-issued hybrids as their main solution. However, hybrids include equity-like risks so lack defensive characteristics and do not offer a high level of diversification.

“The Fund offers investors the opportunity to access a diversified Australian fixed interest portfolio that aligns with investors’ personal and social values without compromising investment returns over the long term.”

Companies are excluded from the Fund’s investment universe if their primary business activity involves armaments, uranium, gambling, tobacco production, pornography, alcohol production, or production or sale of thermal coal.

The remaining investment universe is given a sustainability ranking. A company may be excluded from the investment universe if it is materially involved in causing or perpetuating injustice and suffering; infringing human rights; supporting oppressive regimes; animal testing for cosmetic purposes; having unacceptable environmental management practices; or having unacceptable occupational health and safety practices.

The Fund aims to outperform the better of the Bloomberg AusBond Composite Index* (the benchmark) by one percent per annum and the RBA cash rate through a cycle (before fees).

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The fund was launched after a successful book build period in late November.

Bill Bovingdon, chief investment officer of Altius, says every well-diversified investment portfolio should include an exposure to bonds but investors seeking responsible investment choices in fixed income have had few options available to them.

“Unfortunately there are limited investment options available to investors looking for fixed interest investments managed with regard to environmental, social and corporate governance principles.  As a result, fixed income may have been left out of their investment portfolios, which has restricted diversification and performance.

“Often investors use bank-issued hybrids as their main solution. However hybrids include equity-like risks so lack the defensive characteristics that bond investors require.

“We are seeing an increasing number of investors mentioning responsible investing as a consideration for them and decided to launch a fund that meets this growing demand while at the same time delivering solid, stable returns.”

“Bonds will be automatically excluded from the fund’s investment universe if the primary business activity of the issuer is clearly at odds with the fund’s ESG principles. This includes activities such as production of armaments, uranium and tobacco.

“The remaining investment universe is screened in line with the Altius Sustainability Policy, with companies in the universe  given a sustainability rating which is incorporated into the portfolio construction process.

“This ranking process is intended to assess the impact of the company’s operation on the well-being and sustainability of the community and environment in which it operates,” Mr Bovingdon says.

“To  provide investors with a voice on how the investment universe is formed and evolves over time we have established the Altius Sustainability Advisory Committee which consists of two investor representatives. The current members include the  cornerstone investor groups, Matthew Moore senior portfolio manager from Uniting Financial Services who sits on the Uniting Church (NSW) Synods Ethical Investment Committee and is a former director of the Responsible Investment Association Australasia and Trevor Thomas from Ethinvest.”

The Altius Sustainable Bond fund joins the other funds in the Altius stable – the Altius Bond Fund and the Strategic Fixed Interest Trust.

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Chris Dickman

Altius Asset Management says investors are generally failing to realise there are significant differences between bond funds, and that different management styles are hugely influential in determining whether performance meets investor expectations.

Mr Chris Dickman, senior portfolio manager at Altius Asset Management, says rather than thinking of bonds as a homogenous asset class, investors should look at the differences between bond funds in order to ascertain which are performing well, and which are not.

In contrast to traditional fixed interest managers, Altius takes an active, diversified approach to bond fund management.

“The objective is to look after investors in all parts of the cycle, not just when rates are falling or stable,” Mr Dickman says.

“Our nimble style, driven by our objective of beating both cash and bond returns, is an advantage for investors. We focus on generating income when bonds are generating capital losses, but we are swift to shift our focus to also exploit the potential for capital gain when the time is right.”

Unlike many fixed interest managers, Altius does not take a set and forget approach, and would rarely hold a bond to maturity.

“We take an active approach and will only hold a bond until it has reached its return targets. We carefully monitor and adjust our portfolios accordingly,” Mr Dickman says.

Altius’ approach combines both credit and duration strategies, in an effort to optimise returns for investors in all market conditions.

“Credit risk is a key consideration when investing in fixed interest, as it reflects the probability of timely repayment of interest and principal. More creditworthy securities have higher credit ratings and are considered to have relatively low probability of default, while lower rated securities can constitute medium to high risk,” Mr Dickman says.

“For instance, corporate bonds are generally issued by companies on an unsecured basis. In Australia, the credit quality of the market is very high and dominated by major banks and blue-chip industrial companies. These bonds provide higher yields than comparable government bonds, but do have credit risk that must be assessed.”

He says duration risk is another factor to be taken into account when managing fixed interest portfolios.

“In a falling interest rate environment, a longer duration instrument will enjoy a larger capital gain than a shorter duration instrument, while some investments like cash or term deposits provide no capital gain potential at all,” he says.

Commenting on the outlook for the bond market in Australia, Mr Dickman says the shape of the yield curve for fixed interest is quite steep, especially in corporate and semi-government bonds. However, he says the three to five year part of the curve is quite attractive. This means it is possible to pick up a relatively high yield, compared to what is possible elsewhere, by buying a similar security that is only a fraction longer in duration.

“In the current environment, the pick up in yield out of bank term deposits and into intermediate maturities (such as corporate and bank) is quite high.

“Given the upward tendency in Australian government bond interest rates and the low running yield, we retain a bias toward a shorter maturity profile but favour higher yielding semi-government and corporate bonds,” Mr Dickman says.

The pace of transition away from mining investment in the Australian economy continues to be sluggish, and he expects further weakness in the Australian dollar as the US economy strengthens and US interest rates rise.

“A falling Australian dollar will do some of the heavy lifting for the RBA and reduce the pressure to reduce interest rates further. However, the RBA’s concern with the employment market remains acute, thus inviting further moves to reduce interest rates.”

He says the path to rising bond yields is likely to be slow and somewhat volatile. Any upward march of bond yields will be further tempered by below trend growth.

“While we expect Australian cash rates may fall further, we believe longer dated bonds, especially Commonwealth, will sell off modestly, driven by higher yields in longer dated US Treasury bonds,” Mr Dickman says.

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“With yields at historically low levels, investors holding fixed interest portfolios that reflect the benchmark rather than being actively managed do run the risk of incurring capital losses.
 
“However, it’s important for long term investors to have a well-diversified portfolio that holds fixed interest because having a duration exposure is the best way to cushion portfolio losses when there is a downturn in equity markets, typically driven by a poor economic outlook,” says Bill Bovingdon, chief investment officer at Altius.
 
“Whether investors believe the global economy will recover or will deteriorate further, having some fixed income exposure to provide duration is important to maintain a balanced portfolio.
 
“In either economic environment, active fixed interest fund managers can add value with well-constructed strategies that also help protect capital.
 
“For example, while duration is your friend in poor economic environments, it can quickly turn into a foe when the economy improves if the bond investments are not well-managed.
 
“In a rising rate environment, this could include investing in short-dated bonds which have a lower duration and are therefore less sensitive to interest rate changes.
 
“Short-dated corporate bonds that have a yield above the cash rate benefit from capital gains (in addition to accrued income) as the yield falls toward the cash rate over the life of the security.
 
“Other strategies include investing in floating rate notes (FRNs), as they pay a fixed margin above an agreed level such as the bank bill swap rate and avoid the downside of rising interest rates by giving up some of the potential upside if rates fall. In a rising interest rate environment, spread compression can lead to capital gains in FRNs. Using interest rate swaps to swap fixed rates for floating rates can also benefit returns.”
 
Mr Bovingdon said unfortunately traditionally managed fixed income portfolios and index funds do not provide this flexibility for investors.
 
“There is a tendency for investors to lump all fixed income funds into the one bucket, yet active managers that have developed processes and strategies – such as the ability to switch into credit strategies and floating rate notes – can add real value.”
 
He added Altius believes that domestically a two-speed economy remains and the transition is unlikely to be smooth or perfectly timed.
 
“With inflation tracking at the mid-point of the inflation objective, the Reserve Bank of Australia (RBA) is able to provide further stimulus if required.
 
“Overall Altius believes the short end of the Australian yield curve will be underpinned by RBA easing, while upside surprises on global growth will put pressure on longer dated bonds.
 
“China and the US, in general terms, have seen improved economic performance year on year since 2010. While data releases for the second quarter of 2013 have mostly been weak, it is likely this is a temporary soft patch due to the US sequestration and seasonal factors (second quarter data has been weak for the past three years).
 
“Such scenarios mean it is important to have fixed income exposure in a broader portfolio context to act as a counter to equity markets. In rising rate environments fixed income does not need to be the enemy,” Mr Bovingdon said.

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“Indeed, there is increasing evidence that many investors are confused by what fixed interest really means. 

“Equating fixed interest with term deposits is not a balanced approach and, from a diversification point of view, is not much better than having no fixed interest investments at all,” Mr Bovingdon said. 

He said that fixed interest securities play a crucial defensive role in any well-balanced investment portfolio. 

“Fixed interest can provide predictable, regular income and act as a foil against the losses made on equity holdings during an economic downturn. 

“However, a poorly constructed defensive allocation will fail in meeting defensive and risk-management objectives in times of market turmoil, such as we have seen in recent years. 

“Investors need to do some research to educate themselves about fixed interest investments. 

“Advisers should encourage their clients to spend the same sort of time understanding fixed interest as they do equity markets, to ensure they have a basic knowledge of the range of products that make up the fixed interest sector and the benefits and risks associated with each. 

“Not all assets that have been labelled fixed income are ‘true to label’, and furthermore, not all bonds are made equal. 

“Advisers and their clients need to be aware that some are inherently much more risky than others, and others are just not fit for purpose if the objective is to create a safe, predictable source of income that also diversifies a portfolio’s equity risk,” he said. 

Mr Bovingdon said investors and advisers should appreciate the two desirable characteristics of fixed income in a portfolio. 

He said they provide:

• a predictable and regular source of income (the investor gets predetermined coupons plus the principal back at maturity, making cash flows predictable)
• portfolio diversification.

“The importance of defensive role of bonds cannot be underestimated for all investors, and for some, such as retirees, it is particularly critical. 

“In addition, the relative stability of bond returns not only reduces overall portfolio volatility, but also over the medium to long term, bonds are negatively correlated to equity prices which improves the risk return profile of the overall portfolio. 

“These are points that investors should understand about fixed income,” he said. 

Altius has developed a list of risks that investors should consider for fixed interest investing, as well as a definition of investment products that make up fixed interest (see attached).

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Ms Thomson has eighteen years experience in the financial services industry.  She was most recently with ING Investment Management, as a senior research analyst – income assets, within the fixed income department. Prior to this, she was head of risk and business strategy at ING.  She has also worked at Macquarie Bank in London in project and structured finance, and started her career at Mercantile Mutual Life Insurance as an actuarial analyst. 

Ms Thomson holds a bachelor of science, majoring in pure mathematics and mathematical statistics, from the University of Sydney, and an MBA from the Australian Graduate School of Management.  She is an associate of the Institute of Actuaries of Australia. 

Altius was established last year as a joint venture between its principals and Australian Unity Investments and launched its first fund in July this year. 

Mr Chris Dickman, senior portfolio manager at Altius, said that the Altius approach is to take advantage of both credit and thematic opportunities in the market to optimise returns for investors. 

“Ongoing market volatility and economic uncertainty, particularly in Europe and the US, can bring attractive investment opportunities and high-quality credit skills are vital in exploiting these.  

“Vanessa has a diverse range of sector experience both across investment and sub-investment grade levels, and tremendous quantitative skills, which will prove very useful to our investment activities. 

“We had a very clear idea of how the credit research role will work within the business, and the skills and experience we required to complement the rest of the team, and Vanessa fits these criteria perfectly,” he said.

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