AMP Capital is moving to a composite bond index for its almost $2 billion NZ fixed income fund as of next year.
Currently tagged to the Bloomberg NZ Government Bond Index (NZGBI), the AMP local fixed income fund will adopt the new benchmark – comprising a mix of corporate and government securities – on January 1, 2019.
In a note to investors, AMP Capital NZ head of distribution, Rebekah Swan, says: “As the AMP Capital NZ Fixed Interest Fund holds a combination of government and non-government securities, the composite index is also more aligned to the underlying securities held in the portfolio compared to the government bond index.”
Swan says the change, which will not impose any costs or portfolio adjustments, also allows “better attribution analysis” of any investment alpha the manager may add.
“Adopting the composite index is also more comparable with how global fixed income markets and managers measure and select a benchmark,” she says in the note.
It is understood, other NZ fixed income managers – most of whom benchmark to the NZGBI – are also weighing up index changes. According to one manager, the Financial Markets Authority (FMA) is prompting the index rethink by insisting that benchmarks closely reflect the actual securities a fund invests in.
The manager said most NZ fixed income managers tend to allocate between corporate and government bonds across a wide range depending on their view of relative value between the assets.
“While you could say comparing a fund with corporate bonds against a government bond index gives managers ‘free alpha’, it really depends on what you’re trying to measure,” the manager said. “If you’re looking to measure security selection skill then [the NZGBI] is not the right benchmark. But if you want to know how successful they’ve been allocating in and out of corporate bonds then it is a good index.”
Changing to a composite bond index would likely require managers to restate outperformance objectives, he said.