Following the one-year anniversary of the FIIG Australian Bond (FAB) Fund in October, and the delivery of a strong 8.15%* (gross) and 7.51%* (net of fees) return for the period ending 30 September 2024, exceeding the industry (and FAB Fund) standard benchmark index^ by 1.04%, we sat down with the Head of FIIG’s Investment Management Team (IMT), Kieran Quaine, to understand how the team achieved those returns for investors and what their outlook is for 2025.
Congratulations on a number of milestones and achievements in the FAB Fund’s first year. Could you explain how you achieved a very impressive 8.15% (gross) return that was greater than 1.00% over the benchmark index?
Simplistically, the predominant answer is that at various times, we positioned the FAB Fund duration ‘long’ and by that, I mean the average tenor of assets held was longer than that of the benchmark index.
Yields for longer dated fixed rate bonds fell significantly during the year and produced capital gains of significance. For example, the 10-year Australian Government bond yield fell from above 5.00% to below 4.00% at one stage during the year.
We did many other things that contributed to the outperformance, including implementing credit exposure and yield curve strategies, but being ‘long’ is the primary attributor to performance.
SQM Research has rated the FAB Fund ‘Superior’ and given you a four-star rating. It must be very satisfying to receive that independent acknowledgement. Can you elaborate on that achievement?
Yes, extremely satisfying, as it acknowledges our team’s experience, our investment strategy and our performance, to be of the highest industry standard.
Outside the FAB Fund, the Investment Management Team has a near 10-year history of managing large amounts of capital (within the IMA space) across a complex range of fixed income investment mandates. SQM pored through our history, thoroughly unravelling and attributing our performance outcome to strategy applications. They were particularly impressed with our history of protecting investor capital and delivering alpha during negative performance periods for the bond asset class (2021 & 2022) and delivering further outperformance in positive periods.
Ultimately, SQM’s rating is a strong validation of the Fund's robust investment process and risk management credentials.
Can you explain what lies at the core of that Investment Strategy process? Reading your history of quarterly reports and the Investment Management Team’s performance record within, can you explain how you achieve that ‘alpha’, year after year, across a complex range of products?
It is essentially all about experience. I myself have been trading fixed income markets for in excess of 35 years and have managed billions for long time periods. My team adds another 30 years of collective experience. They are each incredibly well educated in finance and Megan Romeo is actually a ‘rocket scientist’ given she has an Honours degree in Quantum Physics!
The Investment Management Team bios are available by clicking here.
Our objective is to protect capital and deliver returns commensurate with the risk profile of each IM under our direction. At the core of our investment strategy process is to understand what the market is doing at any one point in time. What is the current catalyst, or series of catalysts that the market is responding to and the direction it is taking as a function. And what catalysts for change or continuation are in the pipeline.
The catalyst of the last few years has been inflation and we have predicted both the rise and fall of it, and the bond market response to it, extremely well. Before that it was COVID, and before that, there were a number of contributors, including the demise of globalisation.
All historical catalysts of merit since 2015, and our investment strategy responses, are discussed within our QR series.
We subsequently achieve alpha – or excess return over index – by taking calculated risk in response to our assessment of the catalyst impact upon bond market yields. That risk is always duration (maturity) and/or credit risk (accrual v credit margin) based.
We apply that approach ‘tactically’ (shorter-term) and/or ‘strategically’ (longer-term). You can read more about the process within our QR series.
On the back of MIPS IMA and now FIIG Australian Bond Fund success, you have just launched the FIIG Monthly Income Fund (MIF) – a floating rate unit trust. Can you tell us more about that?
Well, firstly, it too has achieved a high ‘favourable’ (3.75 stars) rating from SQM. It applies the same investment process as used by the FAB Fund and all MIPS IMA’s, especially the MIPS floating rate IMA’s that specialise in Bank and Asset-backed securities management. MIF however differentiates from the MIPS IMA’s by being structured as a unit trust, thereby appealing to smaller investors and providing improved liquidity advantages over the Direct Bonds structure.
If investors prefer to avoid the volatility of fixed rate investing, preferring floating rate exposure, and are capable of taking credit risk comprised of a minimum of 70% Investment Grade (IG) and a maximum of 30% Non-IG, then the MIF is a viable opportunity.
The MIPS Bank FRN IMA has a five-year history of outperforming BBSW** (and therefore the Bloomberg AusBond Bank Bill Index) by 1.51% p.a., including 2.46% p.a. in the last two years.
Our expectations of MIF, itself including as a subset the equivalent exposure of MIPS IMA’s, is to exceed BBSW, and subsequently, its Bloomberg AusBond Bank Bill Index, by 2.00% p.a. on a rolling three-year basis.
So, what lies ahead? What is the catalyst for 2025?
Whilst it is never easy to be comfortable in a world that is currently experiencing elevated geopolitical risk of significance, we believe that 2025 will be a good year for the bond asset class because inflation will continue to fall, and monetary policy will be eased. This has been our mainstay prediction since late 2023 and further detail is available via our QR series.
Essentially, tight monetary policy (domestically) has done its job. Inflation has fallen from dizzy heights, unemployment has risen, and discretionary expenditure has been hit hard as budgets have been tightened. That is the story globally and domestically.
We suggest the RBA could ease the Official Cash Rate (OCR) to as low as 3.25% by the end of 2025. The bond market has rallied a year in advance of this expectation, pushing the curve inverted (against/below current OCR), but there is likely still more ‘fat’ left in fixed rate yields.
We expect, with volatility, there is sufficient reason that 3 year and 10-year Australian Government bond yields could fall toward 3.00% and 3.50% respectively at times during 2025.
So how should clients consider the IMT menu of opportunity given your investment strategy?
The IMT will, at times during 2025, likely be applying a ‘long’ duration investment strategy to all products under their management. There will be periods of both strategic and tactical application. Subsequently clients invested in fixed rate products, whether they be via the FAB Fund (Trust) or via MIPS IMA’s, will be positioned to take advantage of a fall in fixed rate yields.
Alternately, should investors wish not to take fixed rate term risk, they could alternately invest in the Monthly Income Fund.
To find out more about the FIIG Australian Bond Fund, click here.
*Past Performance is not a guarantee of future performance.
^ Bloomberg AusBond Composite Index.
** BBSW is the industry standard Rolling 90-day Bank Bill Rate.
For further detail, the IMT’s September 2024 Quarterly Report is available by clicking here and the history of QR’s published since December 2015 available here.