JPMorgan Favored by Top Fund Looking Overseas: Australia Credit
AMP Capital Australian Corporate Bond Fund (AMPACBA), which outperformed its peers over the past decade, prefers U.S. and European banks to the South Pacific nation’s lenders on improving economic prospects in those two regions.
Lloyds Banking Group Plc (LLOY), 2013’s best-performing corporate bond, is the fund’s biggest holding, the AMP website shows. BNP Paribas SA, JPMorgan Chase & Co. are among the top 10, which include Westpac Banking Corp. as the only Australia-based lender. The AMP fund returned 6.2 percent in 2013, beating 21 of its peers, according to Morningstar Australia Pty. It topped the ranks of funds that invest mainly in Australian bonds over the past decade with an average return of 7.4 percent.
Australia’s growth will trail the U.S. for the first time in four years as a mining boom cools, according to a Bloomberg survey of economists. The cost premium for protecting debt of the Big Four Australian banks over U.S. counterparts touched the most in almost six years this month.
“The kind of banks that we’ve identified in places like the U.S., in parts of Europe and the U.K., and to a lesser extent in Australia, were all going to benefit from economies that were improving,” said Mark Beardow, 46, who runs the A$2 billion ($1.75 billion) fund in Sydney. “Many parts of the global corporate bond market are continuing to meaningfully deleverage, particularly financials.”
The average cost of credit-default swaps on Commonwealth Bank of Australia, Westpac and the country’s next two biggest lenders versus the seven biggest U.S. banks widened to 17.4 basis points on Jan. 3, the most since March 2008. It was 12.4 basis points as of yesterday.
Beardow, who talked by telephone yesterday, manages the fund in Sydney with Jeff Brunton and David Carruthers.
U.S. economic growth will quicken by 0.9 percentage point this year to 2.8 percent, based on Bloomberg News surveys of economists. The euro area’s economy will go to a 1 percent expansion from a 0.4 percent contraction. In Australia, the pace will pick up by 0.35 percentage point to 2.75 percent.
The bonds of London-based Lloyds returned about 8 percent on average last year, the most among the biggest 50 corporate issuers in the Bank of America Merrill Lynch’s Global Corporate & High Yield Index. The bank’s debt issued in Australia returned 4.95 percent in 2013, according to Bank of America Merrill Lynch indexes.
The returns beat the bonds of Commonwealth Bank, Westpac, Australia & New Zealand Banking Group Ltd. and National Australia Bank Ltd., the nation’s four biggest lenders. The latter topped the list with a 4.71 percent gain, the data show.
Reserve Bank of Australia Governor Glenn Stevens cut the benchmark interest rate to a record low of 2.5 percent last year to maintain economic growth as the economy struggles to diversify amid a drop-off in mining investment.
Beardow said he favors shorter-term securities in case yields rise. The fund’s duration was 1.39 years in December, versus 2.76 years for the benchmark it uses to gauge performance, according to the AMP website. Duration is a measure of a portfolio’s sensitivity to changes in bond yields, and a smaller figure offers more protection should borrowing costs increase.
U.S. 10-year yields will be 3 percent to 3.5 percent by year-end, he said, from 2.76 percent as of 1:31 p.m. today in Sydney.
Australian 10-year yields will climb to 4.25-4.75 percent, according to Beardow, from 4.05 percent today. Yields on U.S. and Australian government securities due in 10 years and longer have a correlation of 0.948. A figure of 1 means they move in lock-step.
“Now we think rates are largely fair value,” he said. “We see fair value continuing to edge up.” The RBA will keep its benchmark at 2.5 percent this year, he said.
Bill Evans, the top-ranked chief economist at Westpac, says Stevens will need to cut the benchmark rate to 2 percent. Evans is the most accurate forecaster on Australia’s economy, according to data compiled by Bloomberg.
“I would expect to see yields down in this country,” Evans said in a Jan. 24 interview. “That would suggest that you should be buying bonds. We’re not concerned about any credit risks associated with the banking sector. Bank bonds would similarly track the capital appreciation that we’re expecting in government bonds.”
Ten-year yields will fall to 4 percent by year-end, Evans said in a Bloomberg survey of banks conducted Jan. 16 to Jan. 21. It was the lowest forecast among 15 responses. An investor who bought today would earn about 4 percent if the forecast is correct, according to data compiled by Bloomberg.
The AMP Australian Corporate fund can invest up to 30 percent of its assets in global corporate bonds, Beardow said. The challenge is to generate income with company notes and protect returns against higher borrowing costs, he said.
“We’re pretty positive about the economy,” he said. “We want to be particularly active around the possibility that yields do rise very sharply, and we’re keeping duration pretty short.”
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