In our third and final article in the series (click here to read part-one and part-two), we catch up again with Kieran Quaine, Portfolio Manager of FIIG’s inaugural Bond Fund (the Fund), to discuss the targeted returns and investment approach investors can expect.
Thanks for joining us Kieran, following on from last time, what type of investor should consider the FIIG Australian Bond Fund?
Any investor who seeks diversified exposure to the Australian Investment Grade Fixed Income asset class managed by an extremely experienced team with a proven performance record.
The Fund will experience volatility as a function of all the economic forces that drive bond yield changes globally. Investors in the Fund should be prepared for and understand what that volatility may entail. The Fund will be constantly invested, rolling duration longer as assets naturally shorten because they have fixed maturity dates. Investors should consider exposure as a long-term allocation to the asset class because it is benchmarked to an index that is comprised of all Fixed Rate Investment Grade Debt (greater than $100 minimum issue size) issued into the Australian Market.
Subsequently, investors should consider a medium-term investment time horizon, in the order of a minimum of at least three years. Whilst yields may rally, and rally quickly post a significant fall in inflation, and/or a contraction in credit margins, delivering quick gains to the Bond Asset Class and the Fund investors specifically, investors are best prepared for a longer-term horizon that will deliver periods of both capital gains and falls, supported by income accrual at current book value entry yields in the order of 5.50%.
What kinds of returns could investors expect to earn?
The Fund will likely achieve a 5.25% to 5.75% book value entry yield in the first quarter. The variation around this range may be as high as 6.00% and as low as 5.00% depending upon available assets, cash flow timing, and the specific Investment Strategy deployed over time. The Fund will subsequently initially accrue yield at ~5.50% annually.
Total return will be a function of accrual plus (or minus) capital gain (or loss).
Given the Fund will have a duration exposure profile in the order of 5.00 years, adjusted longer or shorter as a function of the Investment Managers Investment Strategy, a fall (or rise) in bond yields will either enhance (or dilute) the accrual yield.
For example, an immediate fall (rise) in yields in the order of 1.00% across the yield curve will increase (decrease) the value of a portfolio of bonds with a 5.00-year duration by 5.00%.
How long should an investor stay in the Fund?
As long as they see value in the asset class and their investment horizon is at least three years.
If the asset class performs extremely well, likely as a function of falling inflation and stable or improving corporate debt credit margins, future entry yields, and re-investment yields will fall. Those lower yields, even adjusted for improved inflation, may not appear as attractive. Investors may not see the continuing advantage of value in the asset class. This may be a reason to divest.
If an investor's investment horizon shortens, and certainly below three years, they may wish to align their investment exposure equivalently shorter. Matching your asset (investment exposure term) and your liability (your requirement for the certainty of outcome) are cornerstone investment management tenets of merit that ensure undue risk is not taken and adverse outcomes are not realised.
Investors in the Fund will benefit from regular distributions of information, including a detailed quarterly report, from their Investment Management Team.
Can existing investors transfer existing (Investment Grade) bond exposure into the Fund in exchange for units in the Fund?
Yes, subject to the minimum parcel sizes for the particular bond in question.
In November we will advise existing FIIG investors of procedures to follow to transfer existing holdings ‘in specie’ into the new Fund. Your Relationship Manager will communicate the opportunity.
- Assets will transfer at the end of the day (EOD) valuation on the transfer day.
- Units will be issued to a value equivalent to EOD valuation.
- Asset transfers in lower than wholesale market parcel sizes ($500k Face Value) may require internal FIIG Direct Bond ‘aggregation’.
- Most vanilla fixed and floating rate Investment Grade assets currently held within the FIIG Direct Bond ecosystem will be accepted.
- A definitive list of approved assets that the Fund will accept will be finalised and communicated.
- CPI-linked assets will not be accepted.
The clear advantage for investors is instantly improved diversification and bypassing any sale price and volume liquidity through the agreed exchange at valuation.
Speak to your FIIG Relationship Manager who will assist in elaboration on these discussion points.
Summary and wrap-up
Find out more about the FIIG Australian Bond Fund here: FIIG Australian Bond Fund - Now Open for Investment
