Nikko Asset Management has joined the growing band of local bond managers shifting to a Bloomberg composite fixed income benchmark, the latest Melville Jessup Weaver (MJW) quarterly investment survey reveals.
Last year AMP Capital led the charge to a composite index for NZ fixed income followed closely by Harbour Asset Management. Previously, AMP Capital – like most NZ bond managers – rated itself against a sovereign-only index – while Harbour operated a bespoke half-in-half government/corporate benchmark.
With Nikko now adopting the composite index, over half of the NZ fixed income managers (including Russell Investments, which uses Harbour for the asset class) in the MJW survey have gone composite: for now, ANZ, BT and Fisher Funds remain attached to the sovereign benchmark.
The Bloomberg fixed income composite benchmark currently allocates about half to NZ government bonds with 20 per cent apiect to ‘supranationals’ and corporate bonds, and the remaining 10 per cent in local government issues.
Ben Trollip, MJW principal, said “my preference” would be for all NZ fixed income managers to work to the same composite index.
“We are broadly supportive of this shift because the composite index more closely reflects the make-up of the typical core fixed income fund,” the MJW report says. “However, the change does have implications for outperformance expectations and the level of duration in portfolios.”
Meanwhile, fixed income markets provided just about the only good news for investors during the December quarter with both local and global bond indices posting positive returns as equities tanked.
All NZ bond funds in the MJW survey were up over the quarter, racking up returns ranging from 0.7 per cent for the Harbour short duration fund to 2 per cent for the Fisher NZ fixed income fund.
MJW says the solid NZ bond performance was due to falling interest rates “leading to mark-to-market gains on fixed interest securities”.
“Longer duration funds have more sensitivity to interest rates, and this is perhaps why the top performing New Zealand bond und for the quarter was Fisher’s. Fisher has 5.2 years’ duration versus a much shorter duration peer group,” the report says.
“… In global bonds it was a similar story with the longer duration funds benefitting the most from the falls in interest rates. Fisher’s Wellington fund was the top performing over the quarter with a return of 2.3% (a very good return given the low interest rate environment). Wellington does tend to be a more defensively oriented manager, so it is perhaps unsurprising to see it top the table this quarter.”
However, several global short-duration and credit funds fell into negative territory during the December quarter, the MJW survey shows.
Trollip said the opposite fortunes over the quarter of bonds and equities (where all funds – local and global – were in the red) highlighted the perennial power of diversification.
“Even in a period of rising interest rates it still makes sense to keep bonds in your portfolio,” he said. “It’s the cheapest form of insurance investors can get.”
The MJW report also illustrates how market sentiment on the interest rate environment is in a state of flux.
Last September market consensus indicated there would be at least three further interest rate hikes in the US in 2019 but as at this January a more dovish mood prevailed.
“Now the data suggests the Fed is more likely to keep rates on hold this year – or even cut,” Trollip said. “Essentially, markets are unsure about where interest rates are going.”