Unusual liquidity conditions in March saw just about all fixed income managers fall short of their respective benchmarks in the first quarter of 2020, according to the latest Melville Jessup Weaver (MJW) investment survey.
Local bond managers performed slightly better than global counterparts but even the median NZ core fixed income fund returned 0.6 per cent under the now-standard Bloomberg composite benchmark quarterly 2.5 per cent result, the MJW report shows.
Best of the NZ core fixed income managers over the March quarter, the $2 billion plus ANZ fund, was up 2.7 per cent, however, the investment house is the only one to benchmark against the local government bond index, which returned 3.5 per cent for the period.
Ben Trollip, MJW principal, said the relative underperformance of most bond funds over the quarter was not surprising given the extremely tight liquidity conditions in March with extreme credit spread blowouts impacting returns.
“Since most managers take incrementally more credit risk than their benchmark, the widening of credit spreads heavily impacted their returns,” Trollip says in the survey report.
The average global core fixed income manager was down 0.7 per cent during the quarter compared to the Bloomberg Barclays Global Aggregate index return of 1.4 per cent with only the AMP passive fund keeping on benchmark.
Trollip said the survey shows an interesting divergence in quarterly returns among the various versions of the PIMCO global fixed income strategies available to NZ investors. PIMCO-based returns ranged from -0.5 per cent for the ANZ mandate to -1.9 per cent for the Fisher Funds’ iteration – and -0.7 per cent for a stand-alone PIMCO fund.
Meanwhile, the global sovereign bond index was up 4 per cent in the March quarter as the safety-first asset class came into play.
But as the MJW report notes, the March “sell-off was so broad that even ‘safehavens’ such as US Treasuries and gold struggled”.
Trollip said liquidity conditions in April have eased considerably following central bank market interventions with bond managers again outperforming indices in the month so far.
Of all the other asset classes captured in the MJW survey only core NZ shares, global growth equities and offshore property funds beat their respective benchmarks over the three months ending March 31.
Overall, the NZ share market held up comparatively well during the quarter, down just 14.5 per cent against -20 per cent for the MSCI World hedged benchmark. (However, NZ-based unprotected global share investors saw a 10 per cent currency bump in the quarter with the unhedged MSCI falling just 10 per cent.)
The MJW report says NZ active managers “did well, with a median return of -12.4%”.
“This was despite a smattering of Australian market exposures across the group which would have been a headwind. Larger stocks outperformed significantly, with the Smartshares Top 10 fund, for example, only falling 7.5%,” the survey says.
Trollip said the 2 per cent benchmark outperformance for the median NZ manager (albeit before fees and tax) was an impressive result given most investors budget for 1.5-2 per cent annual ‘alpha’ from local active funds.
Even so, the survey reveals a reasonably wide spread of quarterly returns among its cohort of 17 Australasian share funds ranging from -8 per cent for Mint Asset Management to -17 per cent for the Castle Point Funds Management trans-Tasman strategy.
But divergence was wider still among international share managers over the March quarter as a chasm opened up between ‘growth’ and ‘value’ styles.
The average value manager was down 17 per cent during the three-month period compared to just a 3 per cent loss in the growth group, the MJW survey shows.
Among all the offshore share managers covered by MJW only the AMP Capital Global Companies fund posted a positive return in the March quarter – up 0.8 per cent, about 10 per cent above the unhedged world equities index.
“It’s a very concentrated portfolio and has likely ridden the quality wave over the last quarter,” Trollip said.
Some alternative strategies did offer a “kind of” respite in March, he said, with the Alvarium (formerly NZAM) Absolute Return fund falling just 2 per cent and the Nikko Multi-Strategy fund (operated by JP Morgan) returning about -4 per cent.
The KiwiSaver sector, though, “took a significant hit this quarter, with every fund we cover presenting a negative return”, the report says.
“Results ranged from -13% on average for growth funds to -3% on average for conservative funds,” the MJW survey says. “These figures are close to what was experienced during the global financial crisis. However, most savers’ balances are significantly larger than they were when KiwiSaver was in its nascency and so the losses in dollar terms will probably be higher.”
Since late March, global investment markets have staged a large, if brittle, recovery but the huge ongoing volatility has considerably shrunk the life-span of already evanescent short-term predictions.
“The near future remains extremely uncertain and there is no shortage of forecasters giving their predictions,” the MJW report says.