Morningstar today released its Sector Wrap for Australian and global fixed income funds, covering 58 strategies across unlisted and exchange traded funds.
- Funds that achieve Morningstar Analyst Ratings™ 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 18 were designated Silver and 14 Bronze. We upgraded Colchester Global Government Bond from Bronze to Silver, and BNY Mellon Standish Global Bond Fund and Vanguard Australian Government Bond ETF from Neutral to Bronze. We downgraded Nikko AM Australian from Bronze to Neutral, and subsequently placed the rating Under Review and placed Advance International Fixed Interest Multi-Blend Under Review.
- We initiated coverage of seven new strategies – PIMCO Global Credit (Silver), PIMCO Income (Silver), Vanguard International Fixed Interest ETF (Bronze), Payden Global Income Opportunities (Neutral), Vanguard Australian Corporate Fixed Interest ETF (Neutral), Vanguard International Credit Securities ETF (Neutral), and iShares Government Inflation ETF (Neutral). We ceased coverage of three strategies because they no longer met our criteria for coverage – Goldman Sachs Global Strategic Bond, PIMCO Unconstrained Bond, and Russell Australian Select Corporate Bond ETF.
- The merits of unconstrained bond funds were put to the test in late 2016 as sovereign bond yields rose steeply. Many investors have favoured these strategies to guard against rising yields and it was reassuring to see that most of the vehicles handled the challenge relatively effectively. The evidence from 2016 supports the case for the role of unconstrained bond strategies as diversifiers in investor portfolios, although investors should be diligent in understanding the particular traits of each vehicle, as there is a wide assortment of options to choose from.
- The ongoing suitability of traditional, high grade bond funds has continued to be questioned given the low level of bond yields. We still believe that these strategies remain effective portfolio diversifiers, though the cost of this insurance clearly isn’t cheap. While it’s easy to shy away from these funds given the low returns on offer compared to history, the importance of having a diversified portfolio to meet investment objectives shouldn’t be ignored. It is in this context that high quality bond funds with duration can be particularly valuable.
- Non-traditional bond strategies have continued to garner the lion’s share of flows across the fixed income fund universe. The popularity of these vehicles indicates that investors remain particularly concerned with how to position their bond allocation in a rising interest rate environment.
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.