NZ income funds have delivered almost double the returns of pure bond markets over the last year, the latest Melville Jessup Weaver (MJW) investment survey reveals.
In a new wing of its diversified fund sector analysis MJW found the group of five NZ-based income products returned a median 9.2 per cent over the 2017 calendar year compared to 5.5 per cent for NZ bonds and 4 per cent for offshore bonds.
According to the MJW report, the selected group of funds – most of which launched within the last three to five years – have tapped into a persistent demand for yield in the current low-rate environment.
Despite outperforming bond benchmarks, the income product sector was outgunned by the more equity-heavy balanced fund cohort that was up 14 per cent over the year and 10 per cent in the three-year period (compared to 7.3 per cent for income funds).
“While there is significant variance in the investment mandates, generally these funds have around 60% in cash and bonds, and a bias towards higher yielding equities (e.g. New Zealand equities as well as infrastructure and property equities),” the survey authored by MJW principal, Ben Trollip, says.
The Milford income fund has topped its four rivals in the category for every period over the last three years with returns of 12.4 per cent for the 12-month stretch and a three-year annualised 11.9 per cent performance.
Milford also was number one over the five-year period beating out its only rival at the time, Nikko, which offers the sole product in the category boasting a 10-year record.
“Nikko’s Income Fund includes an exposure to its Option Fund strategy which is classified as an income asset despite it periodically experiencing equity-like volatility,” the MJW survey says.
The Nikko product also has the highest allocation to income assets (100 per cent) compared to the group, which range from an exposure to cash and bonds of about 55 per cent (AMP Capital) to 76 per cent (Mint Asset Management).
Elsewhere, NZ and Australian equity manager performance continues its recent divergent trend with widely disparate results in the latest MJW survey. The top-performing NZ shares manager for the 2017 calendar year, Castle Point (albeit with marginal assets under management), returned 34.7 per cent for the period, more than double the 16.2 per cent reported by the bottom-ranked of the 18 products in the category, the Devon NZ Core fund. The S&P/NZX 50 index was up 23.6 per cent for the annual period.
Over the five-year period the best-performing NZ equities fund (Milford) and worst (AMP Capital) returned 21.1 per cent and 16.7 per cent, respectively, against the benchmark S&P/NZX 50 17.1 per cent.
Mirroring wider market trends, KiwiSaver experienced another positive quarter, the MJW report says, quarter, “especially those at the riskier end of the spectrum”.
“The median growth fund returned 5.0% for the quarter and 15.7% for the year,” the survey says. “This compares to 1.9% and 6.8% respectively for the median conservative fund.”
MJW says the relatively high allocation of KiwiSaver growth funds to cash (8.3 per cent) shows scheme managers are likely downbeat on the prospect for bonds. Furthermore, the dearth of alternative asset exposure among the 12 growth funds analysed by MJW – where just five products have an average 2.4 per cent allocation to alternatives – continues “despite worries that traditional asset classes may be overvalued”.
“With low exposures to bonds and alternative assets, that leaves equity sectors. Including property sees equity exposure at 75.6% on average,” the MJW report says. “One should expect the fortunes of these KiwiSaver funds to be closely tied to those of the equity market.