Equities have not been the only markets to experience extreme volatility in recent weeks. There has been a flight to safety in fixed income markets, spreads on corporate debt have widened and liquidity has dried up in corporate and structured credit markets.
Morningstar reviewed the performance of a number of fixed income funds during the recent sell-off, covering the period from 21 February to 16 March, to see how different strategies are performing under stress.
The top-performing Australian fund in the Morningstar data set is CFS Wholesale Australian Bond, whose relatively long duration portfolio has worked in its favour as rates have fallen. The fund rose 61 basis points over the review period.
Pendal Fixed Interest (up 44 bps) and Schroder Fixed Income Fund (up 15 bps) also benefited in this way. The sector benchmark, the Bloomberg AusBond Composite AUD Index was down 6 bps over the period.
The PIMCO Australian Bond Fund, with an aggressive short duration stance, was the biggest underperformer during the period. The fund was down 1.7 per cent over Morningstar’s review period.
Funds with a small or no exposure to corporate credit, which was impacted by the flight to safety, also outperformed. The Vanguard Australian Government Bond Index Fund was a top performer for this reason, as was Jamieson Coote Bonds’ CC JCB Active Bond Fund.
Among global bond funds, the T Rowe Price Dynamic Global Bond Fund rose 2.9 per cent between 21 February and 16 March. Morningstar says this is due to the fund’s highly risk-averse strategy, which includes an active hedging strategy.
The T Rowe Price fund was an underperformer in 2019 – down 0.5 per cent for the year.
The Vanguard International Fixed Interest Hedged Fund was the only global bond fund in the Morningstar data set that produced a positive return during the period.
Global funds suffered as investors shifted to secure and liquid currencies, such as the US dollar and Japanese yen. Funds with exposure to emerging markets currencies suffered heavy losses.
The Legg Mason Brandywine Global Opportunistic Fixed Income Fund fell 11.1 per cent over the period.
Overall, Morningstar says funds that stuck to higher grade securities tended to fare better. A bias to Australia securities was also a positive, with the domestic market holding up better than many overseas markets.
The research house has also warned that some managers are increasing their sell spreads, as liquidity tightens in the credit market.
Among Australian bond funds, at the extreme AMP Capital has increased the sell spread on its AMP Capital Wholesale Australian Bond Fund from10 bps to 90 bps. Vanguard has increased the spread on its Australian Inflation-Linked Bond Index Fund by the same amount.
Among global funds, Macquarie has increased the sell spread on its Macquarie Dynamic Bond Fund from 8 bps to 1.24 per cent.
And among multi-strategy income and more flexible bond funds, the spreads have gone very wide. Kapstream has increased the sell spread on its Absolute Return Income Plus Fund from 10 bps to 2 per cent.
The spread on the Payden Global Income Opportunities Fund has increased from 10 bps to 1.95 per cent.
Morningstar says: “What’s particularly vexing is the question of accessibility. It’s fair to think that investors would have some expectation of being able to liquidate their bond portfolio without fear of incurring a major cost, irrespective of the market conditions.
“Automatic asset allocation rebalancing could be particularly problematic, as significant falls in equity allocations during the March quarter are likely to be re-weighted back by selling fixed interest exposures.”