Global bond investors are in a sweet spot, according to Hunter Investments chief, Tony Hildyard, with gradual rate hikes providing positive reinforcement to returns.
Hildyard said while rapid interest rate hikes can sour fixed income markets with capital losses, the current gentle incline up the yield curve actually suits diversified bond investors.
He said PIMCO, underlying manager of the almost $0.5 billion Hunter Global Fixed Interest Fund, has forecast a “very long and drawn out” normalisation of rates.
“And PIMCO projects that the ‘normal’ we are headed for will see rates plateau at a much lower level than in previous cycles,” Hildyard said. “For bond investors, this is good news as we get to invest cash flows and maturities at steadily higher levels along with the slowly rising rates.”
While some NZ investors may have held off allocating to global bonds fearing rate-rise induced capital losses, he said fixed income markets have barely budged during the four US Federal Reserve hikes in the current cycle including “two in the last six months”.
“In fact, in our portfolio the running yield was 4.5 per cent (NZD hedged) at the end of July, slightly higher than when we launched in last week of March 2017, despite our portfolio actually grossing 3.28 per cent for that period,” Hildyard said.
However, the spectacular growth of the Hunter fixed income fund, which has garnered almost $500 million under management in less than six months, suggests there is significant demand for a global bond solution tailored for NZ investors, he said.
The locally-domiciled Hunter fund, structured as a tax-effective portfolio investment entity (PIE), essentially mirrors the PIMCO global bond strategy – with a few NZ-determined socially responsible investment tweaks (for example, excluding tobacco, controversial weapons manufacturers, and many fossil fuel related firms).
He said the global investment grade bond universe comprises more than 2,700 “unique issuers” across multiple sectors and jurisdictions offering NZ investors the kind of diversification they don’t get at home.
“Interest rates would have to rise sharply and uniformly in all countries, all sectors and all maturities to have the same sort of impact a rise in rates in a single country like NZ would have on its local bond market,” Hildyard said.
“Generally, we believe that the NZ retail investor, in particular, has been poorly served by previously available global bond offerings leaving many Kiwis overly exposed to illiquid poorly-diversified domestic bonds that offer not only a lower yield than global counterparts but are likely to also be more volatile.”
As well as developing strong institutional client base, the Hunter fund is also available to advisers on the FNZ and Aegis platforms or to direct clients via InvestNow.