The majority of actively managed fixed interest funds within the government bond sector generally struggle to outperform the index after the deduction of fees and trading expenses, according to Stuart Fechner, Navigator research manager.
The majority of actively managed fixed interest funds within the government bond sector generally struggle to outperform the index after the deduction of fees and trading expenses, according to Stuart Fechner, Navigator research manager.
Navigator released its annual review of fixed interest funds, involving 17 managers and over 40 funds across a range of fixed interest categories including Australian fixed interest, international fixed interest, diversified fixed interest and mortgage funds.
Given the under-performance of this asset class, the only manager awarded a five star rating in the Australian fixed interest category was Vanguard – a passive style fund manager aiming to replicate the performance of the benchmark at low cost. Vanguard’s approach to fixed interest investment was found to be disciplined and logical and Navigator is confident Vanguard will continue to meet its objectives going forward.
A similar result occurred in the international fixed interest category, where the three funds to receive a five star rating were index performance replicating funds – Vanguard international fixed interest fund (hedged), Vanguard international credit securities fund (hedged) and Macquarie true index global bond fund.
A number of high quality active Australian and international fixed interest managers, with a history of adding value before fees using a variety of strategies, received a four star rating.
Hybrid and high yield funds were reviewed and rated for the first time, with all five managers reviewed judged to be investment grade. Three managers in this category were rated four stars (Challenger, Schroders and UBS) and two managers rated three stars (PM Capital and Portfolio Partners).
Mortgage funds were also included in the review, with the Navigator research team assessing these according to a number of criteria including sector and geographic diversification, liquidity management and lending procedures and guidelines. Two managers within this category were awarded a five star rating (Perpetual and Howard).
"The primary objective within the review is to identify quality managers and funds. This is achieved by the review process producing individual fund ratings based on the characteristics, performance and risk of each fund. Ratings are formulated under a rigorous program of fund manager visits, quantitative assessment of performance data and an extensive peer review process," said Stuart.
The review also identified a number of interesting issues within the different fixed interest categories:
- Australian and international fixed interest
The majority of active Australian fixed interest managers now place a greater importance on credit assessment and have a lesser reliance on duration and yield curve decisions within their investment processes. "A consequence of this trend is an increased need for managers to establish and maintain improved credit research capabilities," said Stuart. - Hybrid and high yield funds
While the Australian hybrid securities market has continued to grow over the last 12 months, there are a number of key points investors need to consider. "The hybrids market still lacks the depth and diversification of the Australian sharemarket, which is evidenced by the fact around half of the securities are issued by financial companies. In addition, hybrid securities will typically contain a greater amount of credit risk in comparison to traditional fixed interest securities."
Stuart also noted, for hybrid securities to remain a viable asset class in the long term, the supply of and demand for new issues needs to remain healthy. - Mortgage funds
Competition for high quality mortgages has remained strong in recent times and this has continued to put pressure on margins. In addition, managers have dealt with continued levels of high liquidity. Stuart notes a number of funds have adopted strategies to cope with high liquidity levels, including investments in short dated securities, floating rate notes and mortgage backed securities.
"Investors should also be aware the sector exposures vary considerably between mortgage funds. For example, the Howard fund has maintained a high allocation to the residential sector, while the AXA fund has had high allocations to the commercial and retail sectors," Stuart added.
Full research details are available to advisers who use Navigator, enabling them to better assess the potential of specific fixed interest fund investments for their clients.
Fund ratings should not be considered in isolation, but in conjunction with the more detailed report and information that is available to advisers when they are assessing and selecting funds for a client’s portfolio.
-ends-
Attached:
- Rating methodology
- Rating definitions
Stuart Fechner is available for interview on 0407 839 080.
For further information please contact:
Simon Morgan
Group General Manager Public Affairs
Ph: (03) 9829 8892
Mob: 0407 966 632
Notes to editors:
- Aviva Australia is a group of two specialist financial services companies: Navigator and Norwich Union Life Australia Ltd. Portfolio Partners, the Australian funds management arm of Aviva plc, is a sister company. Through these companies we provide products and services in the areas of wealth creation, wealth management and wealth protection for more than 300,000 customers throughout Australia
- Globally, Aviva Australia is part of Aviva plc, the world’s seventh largest insurance group, the largest insurer in the UK and one of the top five life companies in Europe. Aviva was formed in May 2000 through the global merger of CGU plc and Norwich Union plc
- Aviva is a leading provider of life and pensions products to Europe and has substantial businesses elsewhere around the world. Its main activities are long-term savings, fund management and general insurance. It has premium income and investment sales from continuing operations of A$78 billion, and more than A$624 billion of assets under management (as at 1 July 2004). The group has more than 56,000 employees and 30 million customers worldwide
- The information in this document reflects Navigator Australia Limited's ("Navigator") understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information given in this document is of a general nature and has not taken into account the investment objectives, financial situation or particular needs of any particular person and it is not a substitute for professional advice. Applications to invest in a financial product issued by Navigator, or any of its related entities, must be made by completing the application form attached to the applicable Product Disclosure Statement ("PDS"). A PDS is available from Navigator or your financial adviser. Before making an investment decision on the basis of the information above, a prospective investor needs to consider, with or without the assistance of a professional adviser whether the information is appropriate in the light of their particular investment needs, objectives and financial circumstances.
Rating methodology
Navigator research provides a valuable and reliable service to financial planners by identifying and monitoring quality managers and funds.
As part of this service, Navigator research reviews each asset class on an annual basis and produces individual managed fund ratings based on the characteristics, performance and risk of those funds. Ratings are formulated under a rigorous program of comprehensive fund manager visits, quantitative assessment of performance data and an extensive peer review process.
The assessment criteria allocates 60% of the rating to qualitative factors related to the fund manager and investment process, and 40% of the rating to quantitative performance and risk factors. Qualitative factors are weighted more heavily as Navigator research believes positive quantitative results are more likely to be achieved if the fund manager, investment process, investment team and the fund itself all exhibit strong features.
The sector review is conducted annually and the ratings are updated monthly. Each month the additional performance is incorporated into the quantitative calculations and any significant changes to the investment team or process are reflected in the qualitative factors.
Rating definitions
The final ratings are based on a five star system, with any fund rated three stars or higher considered to be "investment grade". The definition of each rating is as follows:
| ***** | A superior quality fund indicating a very strong fund manager, investment process and performance history. |
| **** | A very good quality fund indicating a strong fund manager, investment process and performance history. |
| *** | A good quality fund indicating a capable fund manager, investment process and/or performance history. |
| ** | A poor quality fund indicating a weak fund manager, investment process and/or performance history. |
| * | A very poor quality fund indicating a very weak fund manager, investment process and/or performance history. |
| Hold | The fund is under review and new investments should not be made into the fund until a new rating is issued. |
| Not rated | The fund is monitored by Navigator research but has not been assigned a star rating, generally due to an insufficient performance history or it being a multi-manager fund. |