(Corrects to show fund beat all its peers in first paragraph of article originally published on March 11. To be sent story, click here. For columns, TOP CM.)
Bentham Asset Management, whose flagship fund beat all its Australian peers over the past five years, is avoiding the nation’s “expensive” credit markets to buy asset-backed debt offshore and foreign-currency notes of local banks.
Bentham’s A$894 million ($809 million) Wholesale Global Income Fund (BENWGIF) has returned almost 22 percent per annum on average in the past five years, data compiled by Bloomberg show. In February, its top two company holdings were U.K.-owned Northern Rock Asset Management Plc’s mortgage-backed bonds and National Australia Bank Ltd.’s euro notes, its website shows. The firm, which oversees more than A$4 billion, was named the nation’s top fixed income fund manager for 2014 by Morningstar Inc.
“Australian credit has generally been expensive relative to overseas markets,” Richard Quin, the company’s Sydney-based head asset manager, said in a March 7 interview. “For this reason, we tend to focus on global, relative value, multi-sector credit.”
Better-than-expected growth and trade data this month spurred bets the Reserve Bank of Australia will raise interest rates in the next year, dimming the appeal of the nation’s debt. A Bank of America Merrill Lynch gauge tracking Australian sovereign, state and corporate debt has returned 1 percent this year while its euro and sterling-denominated peers offered at least double those gains.
Some of Bentham’s larger holdings include floating-rate global loans, U.K. mortgage-backed securities and European convertible bonds, Quin said. Morningstar’s Australian unit determined the rankings using its own qualitative research, performance in 2013 and risk-adjusted returns over medium- to long-term periods, according to a March 3 press release.
An increase in sovereign bond yields globally may boost investor demand for floating-rate credit products such as loans and asset-backed securities, Quin said. “Current and forecast default rates indicate that the loan market in particular continues to offer very positive risk-adjusted returns,” he said.
Bentham’s Global Income Fund is allowed to hold as much as 50 percent of its portfolio in syndicated loans, according to a fact sheet on the company’s website. It had 29.6 percent of its assets allocated to that area and a further 19.4 percent in collateralized loan obligations last month.
Standard & Poor’s European Leveraged Loan Index has risen 0.5 percent since Dec. 31, while a similar gauge of U.S. dollar-denominated loans has climbed 0.7 percent.
U.S. 10-year Treasuries (USGG10YR) fell, pushing the yield to a six-week high March 7 after data last week showing a bigger-than-expected gain in payrolls supported bets the Federal Reserve will continue a reduction in monetary stimulus.
“We remain negative on interest-rate risk because yields are too low relative to inflation” prospects and “are at risk from the normalization of interest rates,” Quin said.
Australian sovereign bonds have fallen this month after government reports showed the economy grew faster than analysts predicted in the fourth quarter and the trade surplus in January exceeded forecasts by more than 10 times. The statistics bureau may say on March 13 employers added 15,000 jobs in February after shedding 3,700 positions the previous month.
A Credit Suisse Group AG index shows traders are expecting RBA officials to lift benchmark rates 16 basis points over the next year, the most since Feb. 12. Governor Glenn Stevens reiterated he expects a period of stability in borrowing costs in remarks to lawmakers on March 7, three days after he and his board left the cash rate at 2.5 percent.
Stevens “seemed satisfied that interest rates were doing their job to support the economy,” St. George Bank Ltd. analysts including Chief Economist Besa Deda wrote in a note to clients yesterday. “We continue to remain comfortable with our long-held view for the RBA to keep rates on hold for most of this year, before raising them towards the end of this year.”
The yield on Australian debt due in a decade has risen 19 basis points since Feb. 28 to 4.21 percent yesterday, when it touched a one-month high. Australia’s three-year yield, among the most sensitive to interest-rate expectations, climbed 14 basis points to 2.97 percent.
The Aussie bought 90.24 U.S. cents as of 5 p.m. in Sydney yesterday after reaching 91.33 on March 7, the strongest since Dec. 11.
After offering New Zealand dollar-hedged versions of its Global Income and Syndicated Loan funds in 2013, Bentham may consider setting up funds in Singapore or Hong Kong “in the next few years” to broaden its investor base, Quin said.
The lack of variety in Australian credit markets has also kept Bentham focused on offshore investments, he said. Australia’s four largest lenders and the state of Queensland accounted for nearly half of all bank-syndicated issuance by Australian borrowers since 2008, data compiled by Bloomberg show. Westpac Banking Corp. has led sales so far this year with A$4.2 billion of the A$11.1 billion offered, the data show.
“The Australian credit market is relatively underdeveloped, with a very significant concentration in financials issuance and limited diversity of issuers and industry sectors,” Quin said. “All of our mandates are global in scope, giving us the flexibility to search for the best relative value credit assets across geographies, credit sectors, industries and issuers.”
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