Not all bonds are created equal: Altius Asset Management

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Altius Asset Management says investors are generally failing to realise there are significant differences between bond funds and their managers, and that different management styles are hugely influential in determining whether performance meets investor expectations.

Chris Dickman, senior portfolio manager at Altius Asset Management, says rather than thinking of bonds as a homogenous asset class, investors should look at the differences between bond funds in order to ascertain which are performing well, and which are not.

Chris Dickman

In contrast to traditional fixed interest managers, Altius takes an active, diversified approach to bond fund management.

“The objective is to look after investors in all parts of the cycle, not just when rates are falling or stable.

“Our nimble style, driven by our objective of beating both cash and bond returns, is an advantage for investors. We focus on generating income when bonds are generating capital losses, but we are swift to shift our focus to also exploit the potential for capital gain when the time is right,” Mr Dickman says.

Unlike many fixed interest managers, Altius does not take a set and forget approach, and would rarely hold a bond to maturity.

“We take an active approach and will only hold a bond until it has reached its return targets. We carefully monitor and adjust our portfolios accordingly,” Mr Dickman says.

Altius’ approach combines both credit and duration strategies, in an effort to optimise returns for investors in all market conditions.

“Credit risk is a key consideration when investing in fixed interest, as it reflects the probability of timely repayment of interest and principal. More creditworthy securities have higher credit ratings and are considered to have relatively low probability of default, while lower rated securities can constitute medium to high risk,” Mr Dickman explains.

“For instance, corporate bonds are generally issued by companies on an unsecured basis. In Australia, the credit quality of the market is very high and dominated by major banks and blue-chip industrial companies. These bonds provide higher yields than comparable government bonds, but do have credit risk that must be assessed.”

He says duration risk is another factor to be taken into account when managing fixed interest portfolios.

“In a falling interest rate environment, a longer duration instrument will enjoy a larger capital gain than a shorter duration instrument, while some investments like cash or term deposits provide no capital gain potential at all,” he says.

Commenting on the outlook for the bond market in Australia, Mr Dickman says the shape of the yield curve for fixed interest is quite steep, especially in corporate and semi-government bonds. However, he says the three to five year part of the curve is quite attractive. This means it is possible to pick up a relatively high yield, compared to what is possible elsewhere, by buying a similar security that is only a fraction longer in duration.

“In the current environment, the pick up in yield out of bank term deposits and into intermediate maturities (such as corporate and bank) is quite high.

“Given the upward tendency in Australian government bond interest rates and the low running yield, we retain a bias toward a shorter maturity profile but favour higher yielding semi-government and corporate bonds,” Mr Dickman says.

The pace of transition away from mining investment in the Australian economy continues to be sluggish, and he expects further weakness in the Australian dollar as the US economy strengthens and US interest rates rise.

“A falling Australian dollar will do some of the heavy lifting for the RBA and reduce the pressure to reduce interest rates further. However, the RBA’s concern with the employment market remains acute, thus inviting further moves to reduce interest rates.”

He says the path to rising bond yields is likely to be slow and somewhat volatile. Any upward march of bond yields will be further tempered by below trend growth.

“While we expect Australian cash rates may fall further, we believe longer dated bonds, especially Commonwealth, will sell off modestly, driven by higher yields in longer dated US Treasury bonds,” Mr Dickman says.

Altius Asset Management is a boutique fixed interest asset management business, formed through a joint venture with Australian Unity.

Altius takes a diversified approach to fixed interest funds management, combining both credit and duration strategies, and seeks to optimise returns for investors in all market conditions.

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For more information please contact:

Chris Dickman – Phone:  02 9112 4701

18 September 2013