The search for yield sees investors scouring fund performance figures, looking for the stellar returns figures that jump out at them. These days, post-GFC, there really should not be any investors left who do not understand that (a), with higher returns, necessarily come higher risks, and (b) that past performance statistics can never be a guarantee that a fund will generate similar numbers going forward. But even in the hitherto unexciting fixed-income field, there are some high-quality managers, doing different kinds of things that are posting some highly attractive returns.
Setting the scene
Part of this is the addition in recent years of credit investments to the fixed-interest asset class (some investors see this as an asset class in its own right.) ‘Credit’ is associated mostly with corporate credit risk. The term covers corporate investment-grade bonds (those rated BBB- or higher), corporate high-yield bonds and corporate loans – instruments which may include interest rate risk but also have a clear element of ‘credit’ risk with respect to the credit quality of the issuing company – as well as ‘synthetic’ credit products, such as collateralised loan obligations (CLOs) and credit derivatives. Unconstrained, active Australian managers can play in all of these spaces if they choose – and some of them are very good at it.
Also playing some role is the re-emergence of mortgage securitisation, and the return of residential mortgage-backed securities (RMBS) as a potential investment in the interest-bearing space. This market virtually closed in the GFC, but in the 12 months to April, more than $6 billion of new RMBS issues returned to the Australian market.
These developments have widened the investment field, so that investors looking at the enhanced cash/fixed-interest/credit space have to do a bit of work to find out exactly what their funds invest in. But the flipside of that situation is that there are some highly interesting funds in that field, generating very interesting returns – with the caveat that a value-led bull run has helped fixed-income products in general, and arguably, investors are becoming a touch complacent in this space.
The funds
Some of the candidates in this space that are worth a look are the following funds:
The $2.5 billion Kapstream Absolute Return Income Fund. Since inception in May 2007, the fund has returned 6.03% a year, net of fees, investing across the full spectrum of interest-bearing investments, and going ‘short’ (selling investments with a view to buying them back, to profit from falling prices.) The minimum investment in this fund is $10,000.
The $1.02 billion Bentham Global Income Fund, which invests in a wide range of global fixed-income and credit investments, including convertible notes, syndicated loans, hybrid securities, bank capital securities, credit securities, CLOs and RMBS. Since inception in September 2003, the Bentham Global Income Fund has returned 8.3% a year after fees. The minimum investment in this fund is $10,000.
The $45.5 million Bentham Wholesale High Yield Fund, which invests mainly in sub-investment-grade US corporate debt securities (that is, high-yield bonds), as well as smaller exposure to syndicated loans and collateralised debt obligations (CDOs). Since inception in October 1998, the Bentham Wholesale High Yield Fund has racked up 9.2% a year in total net return. In recent years, with low interest rates, this return has been even stronger: in the five years to 31 May 2014, the fund has generated an outstanding 17.6% a year. Over three years, the performance declines to a still-stellar 12% a year and over the last 12 months, investors have been rewarded with 9.7%. The minimum investment in this fund is $10,000.
The $1.1 billion Perennial Tactical Income Fund – invests in domestic fixed-interest and cash, minimum investment $25,000 – has returned 7.5% a year over five years, 6% a year over three years and 5.8% in the last 12 months.
The $1.6 billion Colonial First State Global Credit Income Fund – invests in domestic fixed-interest – minimum investment $5,000 – has returned 8.2% a year over the last five years (to 30 June), 6.7% a year over three years, and 8.2% in the last 12 months.
The $2.1 billion Macquarie Income Opportunities Fund – invests in domestic and international fixed-interest and mortgages – minimum investment $20,000 – has returned 7.2% a year over the last five years (to 30 June), 5.6% a year over three years, and 4.9% in the last 12 months.
The $570 million Perpetual Diversified Income Fund – invests in domestic and international fixed-interest and mortgages – minimum investment $25,000 – has returned 7.9% a year over the last five years (to 30 June), 6.2% a year over three years, and 5.7% in the last 12 months.
The $250 million UBS Diversified Credit – invests in domestic and international fixed-interest – minimum investment $20,000 – has returned 10.8% a year over the last five years (to 30 June), 7.1% a year over three years, and 7.2% in the last 12 months.
Lastly, an interesting alternative is the Firstmac High Livez Trust, launched in December 2011. This is the only fund in the Australian market to specialise in investing in RMBS (it can also invest in other forms of asset-backed securities, commercial paper and short-term money-market securities.) While this means that FirstMac High Livez Trust is a relatively high-yielding income-generating investment from a source not usually tapped, adding diversification to an income portfolio, there is a conflict of interest of sorts, in that the parent group, Brisbane-based Firstmac Limited, is also an RMBS ‘packager’ and issuer – and a big chunk of the trust’s assets are invested in Firstmac’s RMBS (any such investment by the trust must be on commercial arm’s length terms or on terms less favourable to Firstmac than commercial arm’s length terms.)
That aside, since inception the Firstmac High Livez Trust has earned a total return of 8.4%, net of fees, made up of 6.8% in distribution return, and 1.6% in growth return. Over the year to 31 May 2014, the total return was 8.6%, consisting of 5.9% distribution return, and 2.7% in growth return.
While it would not make sense to invest your whole fixed-interest allocation in this fund, adding its virtually unique RMBS exposure to your portfolio – in a small dose – it could be an option. As with every part of your portfolio, the fixed-interest/credit portion should be as well diversified as possible.
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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