Fixed income managers can no longer rely on duration as the 35-year old bond rally fizzles out, according to Mark Mitchell, director of recently-launched Australian boutique bond shop Daintree Capital Management.
Mitchell, in NZ mid-March as part of the Heathcote Investment Partners ‘Meet the Manager’ roadshow, said the traditional long sovereign bond bet is likely to disappoint investors looking for income.
“People are under-estimating duration risk – why would you want to be owning 10-year sovereign bonds if rates go up 100 to 200 points over the next few years?” he said.
“Bond managers now have to be much more nimble and seek more diversified sources of return in the fixed income markets.”
Prior to launching Daintree last year with co-founder Justin Tyler, Mitchell served for seven years as head of credit and portfolio manager at Australian pioneer absolute return fixed income firm, Kapstream.
He said the Daintree strategy follows a similar approach to his former Kapstream portfolio with an emphasis on ‘benchmark unaware’ global credit securities.
“We’re targeting term deposit investors in Australia and NZ who are looking for more income without taking on too much more risk,” Mitchell said. “It’s a very conservative, low volatility portfolio that focuses on capital preservation and generating income.”
Daintree is about to launch a NZ dollar version of its Core Income Trust (CIT) – currently its only product – targeting a return of 2 per cent above the cash rate, which equates to about 50 basis points above the six-month NZ term deposit average rate.
The CIT invests primarily in global credit securities – currently weighted about 75 per cent to Australian issues with the remainder offshore – hedged back to the appropriate currency.
“There’s a good range of credit securities in Australia but you have to remember that Australia and NZ represent about 2 per cent of the global market,” Mitchell said.
“We want eventually to invest more offshore but that introduces volatility, which is an important consideration when you’re offering monthly distributions.”
Unfortunately, the NZ market offers slim pickings for credit managers, he said.
“I feel a bit sorry for [credit] investors there,” Mitchell said.
The CIT is offered here under the trans-Tasman mutual recognition regime, hedged back to the NZ dollar.
He said Daintree as a rule won’t take on currency risk.
“Because of the nature of the assets if you get a 3-5 per cent swing in a currency you could get wiped out,” Mitchell said.
Currently, the CIT has about 85 securities from 73 underlying issuers with an average credit rating of A+.
“We’re aware that Australian banks are AA- rated and we want to stay close to that,” he said, in keeping with the target term deposit investor market.
Mitchell is presenting his ‘Global debt: not your parents’ fixed income market’ thesis at the Heathcote event in Wellington, Christchurch and Auckland over March 13-15.
Daintree is part of the ASX-listed Perennial ‘multi-boutique’ stable of managers. Last week former Perennial head of business strategy, Brian Thomas, reappeared at another Australian boutique manager, Eight Investment Partners, as general manager of business and investments.
It is understood that Thomas, made redundant late last December after 11 years with Perennial, has since settled a legal suit with his former employer.