Fisher Funds has seen a flood of external institutional money pouring into its NZ fixed income strategy over the last six months, lifting assets under management to about $3 billion.
David McLeish, Fisher Funds head of fixed income, said the group’s NZ bond strategy has attracted inflows of some $500 million as a range of local wholesale investors turn to the Takapuna-based manager for the first time.
Until recently, the Fisher NZ fixed income strategy largely serviced the group’s internal KiwiSaver schemes, other house funds and institutional money inherited as part of its 2013 takeover of Tower Investments.
But with the new wholesale flows, the Fisher local bond fund was almost evenly balanced between in-house and external client money, McLeish said.
“We’ve been working away at building relationships with the NZ wholesale investment industry for a number of years,” he said. “But it takes a while to build trust with consultants and clients.”
The growing popularity in wholesale circles of the manager’s NZ fixed income fund also coincided with a period of strong performance (Fisher was named INFINZ NZ fixed income manager of the year), a competitive pricing offer and a series of unfortunate events at the Australian wing of industry mainstay manager, AMP Capital.
Following the publication of damaging sexual harassment findings, the newly crowned AMP Capital Australia chief, Boe Pahari, abdicated in August, triggering a corporate crisis that has ultimately seen the parent ASX-listed AMP field a takeover bid from US investment firm, Ares Management.
In the interim, AMP Capital NZ chief, Bevan Graham, and head of sales, Greg McMaster, also resigned (effective next January for the former).
The AMP Capital NZ parental problems sparked reviews among many wholesale clients leading to some outflows now underway, with Fisher understood to be the main beneficiary of local bond mandate changes.
“We’re seeing a good mix of community trusts, iwi, charities and super schemes coming across,” McLeish said. “We’ve also just signed an agreement with a general insurer.”
It is understood, Fisher has picked up a plum $220 million local fixed income mandate from the $1.4 billion Foundation North, which previously used AMP Capital for the asset class.
Fisher, of course, due to its majority ownership by the TSB Community Trust, has strong links to the sector.
But while the request for proposals (RFPs) keep flowing, McLeish said the actual task of managing NZ fixed income has been “really interesting” over the last six months.
He said with most of the action dictated by “second-guessing” Reserve Bank of NZ (RBNZ) moves, the local bond market has been in flux as the odds change around the introduction of negative interest rates.
While the RBNZ earlier this year clearly signaled a preference to set a negative official cash rate in 2021, better-than-forecast economic figures and a new ‘funding for lending’ program introduced in the November central bank monetary policy meeting have altered perceptions.
McLeish said Fisher has moved to a largely neutral stance compared to its benchmark for NZ fixed after profiting from a long duration position in recent years.
“We’ve dropped a lot of active risk in the portfolio,” he said. “We’re as neutral versus the benchmark as we’ve been in a number of years.”
NZ may have dodged the worst-case-scenario economic disaster predicted at the peak of the COVID crisis but McLeish said the data points to the country “bouncing along the bottom” for some time to come.
“Even before COVID the outlook for the NZ economy was mediocre,” he said. “Now it looks like being more mediocre for a longer time.”
And despite a blow-out in credit spreads in late February and March this year as investors bet on economic meltdown, the window of opportunity in the sector has closed sharply.
However, spreads on NZ corporate bonds are now back to pre-COVID levels, McLeish said, squeezed by insatiable demand from institutional and retail investors alike.
“Investors are not being rewarded for taking risk,” he said.
Nonetheless, McLeish said there were still pockets of value in the NZ credit market, including in the “unrated bond” sector where up to 15 companies, including in the aged-care industry, have made issues of late.
“Many investors shy away from unrated bonds but we think investors can get a considerable pick up in yield [versus rated securities of similar underlying credit quality],” he said. “For example, we argue the aged-care sector is strong investment grade.”
But as the NZ economy splutters on, and risks mount offshore, McLeish said bond investors will need to keep a close eye on credit quality and underlying fundamentals to avoid loss of capital.
“Lots of NZ DIY investors typically buy high-grade local corporate bonds and haven’t really gone wrong in many years,” he said. “But in a long rolling recession some companies could struggle and I worry that many DIY investors don’t have the skills of a good corporate credit analyst.
“You only need to slip up once for your capital to go to zero.”