Morningstar today released its Sector Wrap-Up for Australian and global fixed income funds, covering 54 investment strategies.
- Funds that achieve Morningstar Analyst RatingsTM of Gold, Silver, or Bronze are designated Morningstar Medallists. We allocated one fixed income strategy the highest-possible Analyst Rating of Gold - PIMCO Australian Bond. A further 15 were designated Silver - Bentham Global Income, BlackRock Indexed Australian Bond, Franklin Templeton Multisector Bond, Henderson Australian Fixed Interest, Henderson Tactical Income, iShares Core Composite Bond (AU) ETF, Legg Mason Brandywine Global Opportunistic Fixed Income, Macquarie Income Opportunities, three PIMCO strategies, Schroder Fixed Income, and three Vanguard strategies - and 14 Bronze. We reiterated one ETF's rating as Negative - Russell Australian Select Corporate Bond ETF - because of our view that the highly-concentrated investment offers little compensation for its risks.
- We initiated coverage of four new strategies, all of them wide-ranging global bond vehicles - BNY Mellon Standish Global Bond (Neutral), Colchester Global Government Bond (Bronze), Legg Mason Brandywine Global Opportunistic Fixed Income (Silver), and T. Rowe Price Dynamic Global Bond (Neutral). We ceased coverage of two - AMP Capital Enhanced Yield is returning capital to unitholders, while BlackRock Monthly Income no longer meets our coverage criteria, in large part because of its dwindling size.
- Australia's major fixed income benchmarks have lengthened in duration, and more foreign entities are now issuing bonds in Australian dollars. Some fund managers have gone beyond that, embracing further offshore exposure by investing outside the index. This can be attributed to a variety of causes. Capacity constraints in Australian debt markets are among the drivers for offshore investment. A central theme for all fixed income funds, however, is that with interest rates so low, managers are searching for yield wherever they can find it.
- Going offshore in search of yield may make sense, although there's reason to treat such moves with caution. Firstly, if the addition of offshore debt holdings is substantial, this can alter a fund's risk and return profile. Secondly, building a global investing capability takes time and resources, and some fund managers are better equipped to invest globally than others. We also advise being cautious of fund managers expanding offshore primarily for asset-gathering purposes, without a compelling investment rationale.
- Low yields and this changing face of fixed income have prompted some to question the role of fixed income in investors' portfolios. A case can be made for adopting new tactics, such as going global or taking an unconstrained approach, but only in a measured way. Nonetheless, the diversification offered by traditional bond funds remains appealing. The narrower dispersion of bond returns relative to equities has the effect of anchoring an investment portfolio's overall returns and providing portfolio ballast in choppy waters.
- Investors and advisers should take care to avoid abandoning a long-held investment strategy at the wrong moment. In the current low rate environment, rather than reaching too far for yield, investors should temper their return expectations, not just for bonds but for equities and other asset classes as well.
Morningstar's independent investment research is subscriber-paid rather than issuer-funded. We evaluate managed funds, exchange-traded funds, and listed investment companies at the same time to enable investors and advisers to make the most effective investment decision irrespective of investment structure or active or passive approach.