Chasing yield – AMP’s Corporate Bond Fund

Co-founder of the Switzer Report
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As the Aussie dollar grinds higher, the prospect of a cut in interest rates is starting to develop a little momentum. While still well less than 50%, the probability of the RBA reducing the cash rate further from 2.5% was practically 0% only a few months ago – so what has changed?

A tough budget, falling consumer confidence, US Treasury Bond yields stabilising and now the European Central Bank paying a negative interest rate on bank deposits, are all factors starting to make our interest rates look high, and give strength to the Aussie dollar (see Gary Stone’s technical analysis today). While we may not get a rate cut, what is certain is that any prospect of an increase in the cash rate is well into the future.

Given this scenario and the thirst for yield so strong (eg. driving up the prices of hybrid securities), we thought we should road test one of the more established corporate bond funds.

The advantages of a corporate bond fund include (on paper) a higher return than term deposits or government bonds, and as they usually have a shorter duration than government bond funds, they are less exposed to an increase in interest rates. A downside of course, is the potential for loss due to a default in the underlying corporate bonds the fund purchases – so how the fund actively manages this risk through diversification and security selection becomes pretty important.

At almost $2.2 billion in size, the AMP Capital Corporate Bond Fund is one of the larger corporate bond funds. Here is our road test.

Investment profile

The AMP Capital Corporate Bond Fund invests primarily in ‘investment grade’ rated corporate bonds in the Australian market. It seeks credit securities from companies with strong management, and balance sheets that display characteristics such as sufficient liquidity and low levels of gearing.

In addition to ‘investment grade’ rated securities (defined as those rated by Standard & Poor’s as BBB- or higher), the fund may also invest up to a maximum of 10% in non-investment grade rated securities (must be BB or B), and up to 15% in unrated securities. It can also invest in global credit securities (typically bonds purchased in an offshore market from an offshore issuer), however it has a policy of hedging the principal exposure back into Australian dollars.

It controls credit risk through the application of limits that restrict exposure to individual issuers (according to their rating), and in aggregate across ratings bands. For example, the fund can’t have more than 2% of its assets invested in a single issuer rated in the BB band (BB+, BB or BB-), and in aggregate, the fund can’t have more than 10% of its assets invested in securities rated in the BB band (BB+,BB, or BB-).

At the end of April, the fund had the following profile across the ratings bands:

 

 

Almost 80% of the Fund was invested in domestic securities, and as the following table of the ‘Top 10 Holdings’ shows, exposure to the largest issuer was under 4.0%.

 

 

Interest rate positioning is managed by ensuring that the duration of the total assets of the fund are within 18 months of the fund’s benchmark, the UBS Credit Index 0+ (the standard industry benchmark for corporate bonds). At 30 April, the fund was positioned shorter with a modified duration of 1.61 years compared to the benchmark of 2.95 years.

Management fees

AMP Capital charges a management fee of 0.75% on the retail version of the product (AMP Capital Corporate Bond Fund – Off Platform Class H), plus expenses of 0.02%. This brings the total cost to 0.77% pa, which is about the norm for an actively managed bond fund of this nature.

If you invest through a platform or wrap account, the wholesale version of the fund (AMP Capital Corporate Bond Fund – On Platform Class A) is available. The management fee for this version is 0.60% pa.

Performance

The fund was launched in September 2009 and has performed better than its benchmark (after fees) over most time intervals. The fund’s performance is divided into the distribution component (the income it receives each month which it pays out to unitholders), and the growth component (representing effectively the change in the fund’s NTA due to changes in the prices of the underlying securities).

 

 

While the outperformance against the benchmark is a strong positive, the benchmark only comprises ‘investment grade’ securities whereas the fund can invest up to 10% of its assets in sub-investment grade securities.

Our view

The AMP Capital Corporate Bond Fund is a well-diversified fund, with a credible and consistent performance record. Its size of almost $2.2 billion is arguably an advantage in this case, as scale can be important in achieving a diversified portfolio of credit securities.

Distributions are paid monthly, either in cash or can be automatically re-invested in the fund. The minimum investment is $30,000, which can be initiated via the PDS, which is available here.

For those looking for a little extra yield and willing to accept a little more risk than the risk involved in investing in government bonds or term deposits, this is certainly a fund worth considering.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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