Following on from our last edition (Click here to read), here is part two of our three-part series, where we discuss the strategy and philosophy of FIIG’s inaugural Bond Fund in detail with the Portfolio Manager behind it, Kieran Quaine. Here we gain a better understanding of his investment approach and the type of investors it’s most suited to.
Firstly Kieran, what role can the Fund
play in an investor's portfolio?
A cornerstone role.
This is the case, especially for those investors with AUD25k (the minimum amount to invest in the Fund) and a minimum tolerance for undertaking detailed work managing bond exposure risk and re-investment.
At a macro level, older investors will benefit from the long-term advantages derived from asset allocation into the bond asset class. Equity investment may provide higher long-run returns, but the volatility of those returns is not easily borne where
the investor relies on both stable income and a stable capital base for consistent cash flow distribution.
What can investors expect to
see in the Fund?
Investors can expect to see a highly diversified exposure allocated to:
- Government, state government, senior bank, subordinated bank, corporate and asset-backed securities (ABS), with a moderate allocation to residential mortgage-backed securities (RMBS).
- The Fund will be exposed to vanilla (standard) products in fixed and floating rate structural form only.
- The Fund will not be exposed to CPI-linked products.
- The Fund will not use derivatives, and subsequently, all duration and credit exposure changes will be a function of transactions of physical securities.
Investors can expect to see short (0-3 years) to medium (3-5 years) term exposure to corporate debt, with credit ratings in the AA to BBB range, accompanied by longer term (5-15 years) exposure to the AAA and AA rated government curves.
Please explain the Bloomberg (‘0+’) index against which the Fund is benchmarked?
The benchmark index is comprised of all investment grade fixed income assets issued in the Australian market with a minimum of AUD100m issue size. The chart below shows its performance since 2019. It has a modified duration of ~5.00 years, yields ~4.50%,
and is comprised of near 90% government debt, and near 10% corporate debt. The ‘0+’ is a coded descriptive of “all maturities”.
- Federal Government debt (AAA rated) dominates (52%) the index.
- State Government debt (average AA rated) dominates the balance (30%) of the index.
Source: FIIG Securities & Bloomberg
The Investment Strategy will change as a function of economic circumstances, but the intention is to take tenor (duration) and credit risk different from the benchmark in order to achieve performance in excess of the benchmark.
What is the Risk Profile of this Fund?
The Information Memorandum contains more specific details.
All assets within the Fund must be Investment Grade (IG) rated. That itself indicates how conservative the Fund is, leading to an appropriate categorisation of the profile as low credit risk, medium-to-long duration, fixed income fund.
The Fund is benchmarked to an index of constituents that have a weighted average duration of ~5.00 years, currently yielding approximately 4.50% and an average IG rating of AA.
The key risk parameters of the Fund are set by the Investment Mandate. Key outcomes are:
- Duration (or term tenor):
- A maximum duration limit variation, above and below index (~5.00 years) of +/-2.00 years.
- The risk of a 5.00-year duration exposure is a rise in yields. A portfolio of bonds with a 5.00-year duration will make a 5.00% capital gain (loss) given an (immediate) decrease (increase) in yields (evenly across the yield curve)
of 1.00%.
- Any capital gain (loss) experienced as a function of market yield movement will be enhanced (offset) by the coupon yield, which is expected to be between 5.25% and 5.75% annually.
2. Credit:- A minimum of 30% of portfolio exposure must be held in High-Quality Liquid Assets (HQLA, being Government Debt and cash).
- A maximum of 70% of portfolio exposure can be invested in Corporate Debt, with sector restrictions:
- A minimum of 40% must rank as a senior obligation.
- A maximum of 30% can rank as a subordinated obligation.
- A maximum of 30% can be allocated to the bank debt sector.
- A maximum of 30% can be allocated to ABS.
- A maximum of 25% exposure to RMBS.
What alternative option
might a FIIG client have if they deem the Fund’s risk profile inappropriate for
their circumstances?
FIIG investors who are looking for professional management of their portfolio have a number of alternatives if the Fund’s parameters are not appropriate for their circumstances.
The same Investment Management Team as the Fund implements three other programs within FIIG’s Managed Investment Portfolio Service MIPS.
There is a slightly more conservative strategy in terms of length or duration but similar credit risk, called Conservative Income, which is benchmarked to a 3.50-year duration. If investors are looking for more credit risk, then MIPS also offers Core
Income or Income Plus programs, both of which allow varying levels of exposure to sub-investment grade or unrated bonds.
Alternatively, if investors are looking to invest more than $5m, there is the ability to construct a Customised Investment Mandate agreed between the client and the Investment Management team.
The MIPS programs have larger $500,000 minimum amounts, with the possibility that MIPS account minimums may rise to $1m in the near term.
Refer to the attached MIPS Product Brochure and contact your FIIG Relationship
Manager to discuss.
Summary and wrap-up
Find out more about the FIIG Australian Bond Fund here: FIIG Australian Bond Fund - Now Open for Investment