Rising yields and the increased potential for capital gains have revitalised a long moribund global bond market but NZ investors remain well underweight the asset class, a new Russell Investments paper argues.
Russell NZ investment analyst, Sam Tither, says in the note: “The New Zealand bond market represents less than 0.5% of the global opportunity set.”
The NZ bond market comprises just 180 securities from 50 issuers compared to about 29,000 and 4,000, respectively, in the global opportunity set, the report says. As well, the local fixed income sector is much more heavily skewed to government-related bonds while offshore markets have higher exposure to corporate and securitised debt.
Furthermore, NZ and global fixed income assets are treated the same for tax purposes, as opposed to equities where most Australasian shares are exempt from capital gains taxes, suggesting a somewhat irrational attachment to local bonds.
“While there may be a case for allocating more than that to local assets, in practice, many investors ‘over-allocate’ to New Zealand,” Tither says. “We can see this trend clearly in KiwiSaver as evidenced by the average Balanced fund having over 40% of their bond exposure invested locally.”
In aggregate, KiwiSaver schemes hold about 35 per cent in fixed income assets, split 15 per cent and 20 per cent, respectively, between local and global bonds, according to the Russell study.
Over the 23-year period to the end of September 2023, global fixed income has also outperformed NZ bonds, the study shows, “on both an absolute and risk-adjusted basis”.
Since August 2006, global fixed income returned an annualised 4.9 per cent gross versus 4.1 per cent for local bond indices with slightly lower volatility and a Sharpe ratio (0.44) more than double the NZ market (0.2)
“This outperformance could be attributed to several factors, including; the more diversified nature of the global bond market, a broader exposure to a range of economic conditions, interest rates, and credit qualities,” Tither says.
The fixed income asset class has also proven more resistant to the indexing trend than equities with the median global bond manager in the Russell database delivering persistent above-benchmark returns during the previous decade.
For the 10 years to the end of 2022, the median bond manager was up 0.7 per cent over the index, the report says, with higher aggregate returns still for the Russell selection of funds.
“Another reason to favour active management is that passive management is inherently more difficult to implement with bonds than it is with equities,” Tither says.
“… Our advice to local clients is to adopt active management due to some limitations in common fixed income benchmarks, coupled with the presence of managers that can consistently add value over time.”
The current Russell global bond multi-manager line-up includes RBC BlueBay Asset Management, Western Asset, Schroders in addition to in-house some credit and government debt portfolios.