By Emma Jenkin and Kieran Quaine
Despite a tough quarter with interest rates rising, our individually managed bond account (IMA) returns performed well in the context of the overall market
Key themes for the quarter:
- Trump elected – equities and USD rally
- Globally interest rate curves steepen,
- US inflation increases
- RBA remains at 1.50%
- Domestic growth remains sluggish
- PMT retains short duration
The MIPS programs performed strongly in the context of broader fixed income market moves. The Income Plus program was in the top five Australian Managed Funds in 2016 as reported by Yield Report, with the other programs in the second quartile.
Key contributors to December returns:
- Interest rate increases and a steepening of the curve resulted in lower fixed rate bond prices. This impacted programs depending on the duration exposure
- Senior investment grade (IG) debt was weak, primarily as a function of the yield curve move. This dragged on program returns in accordance with allocations (in brackets): Core Income (92%), Conservative Income (80%), Income Plus (28%) and Inflation Linked (74%)
- Investment grade (IG) subordinated Tier 2 bonds remained stable through the quarter with all programs holding floating rate notes. This provided accrual returns in accordance with allocations (in brackets): Conservative Income (20%), Income Plus (12%) and Inflation Linked (10%)
- Unrated and sub investment grade (High Yield) bonds remained stable through the quarter. This provided strong accrual returns for programs in accordance with allocations (in brackets): Income Plus (60%), Core Income (8%) and Inflation Linked (26%)
With credit stable, allocations across senior and subordinated bonds remained unchanged as did the mix between rated and high yield bonds.
Example credit highlights include:
- Purchase of three new primary issues (CF Asia Pacific, RSEA Safety and NRW) at $100 for Income Plus and Core Income, adding to diversity and yield with all three trading above purchase price
- Purchase of RMBS, Liberty 2016-2 Class D, for the Income Plus program providing diversity and yield
- IG subordinated Tier 2 bonds remained stable through the quarter with allocations static, and
- Senior investment grade bonds’ credit margins widened, led by property and IT sectors.
MIPS Example Portfolio Metrics
The investment metrics for the example portfolios by program as at 3 January were: