Worst Australia Bond Fund Flees Sovereigns to Seek Yield

Bill Bovingdon, Strategic Fixed Interest Trust’s new manager, is seeking higher yields away from Australian government debt to turn around the nation’s worst-performing actively-managed bond fund of 2012.

The trust returned 6.8 percent last year, ranking No. 21 out of 22 debt funds in the nation, according to Morningstar Australia in Sydney. Only Macquarie True Index Sovereign Bond Fund, which tracks a debt index, performed worse with a 5.5 percent gain, the data show. The world’s biggest bond fund at Pacific Investment Management Co., which invests mainly in the U.S., returned 10 percent.

Altius Asset Management Pty, where Bovingdon is chief investment officer, took over Strategic Fixed Interest from Vianova Asset Management Pty in January, after assets plunged 85 percent last quarter and three top officials left. Reserve Bank Governor Glenn Stevens said yesterday interest rates at a half-century low of 3 percent are starting to spur the economy.

“We’re looking for more attractive investment opportunities in our sector mix,” said Bovingdon, 51. “We’ve had abnormally low yields for a long period of time, and we’re slowly seeing a semblance of stability and improvement in growth.”

‘Very Expensive’

Government debt is “very expensive,” so Bovingdon favors state bonds, high-grade corporate debt and mortgage-backed securities, he said. The fund had assets of A$90.9 million ($94 million) at Jan. 31, down from a peak of A$835.3 million in May, according to data compiled by Bloomberg.

The Reserve Bank of Australia may still cut interest rates to a record 2.75 percent this year from 3 percent now, Bovingdon said, even though Stevens refrained from trimming borrowing costs when policy makers met earlier this month.

Australian sovereign bonds gained 5.5 percent in 2012, compared with an average annual return of 9.5 percent, based on a Bank of America Merrill Lynch index set up at the end of 1985. Domestic corporate notes advanced 11 percent last year, according to the Bank of America unit.

The UBS Composite Bond Index of Australian bonds outpaced Strategic Fixed Interest with a 7.7 percent return in 2012, according to the website of Australian Unity Ltd., which is a joint venture partner with Altius and markets the Strategic Fixed Interest Trust.

Record Yields

The gain in prices pushed 10-year sovereign yields to a record low of 2.698 percent in June. The rate rose to a nine-month high of 3.61 percent today, and was 3.59 percent as of 12:13 p.m. in Sydney, versus the average over the past decade of 5.22 percent.

The best performer in Morningstar’s bond-fund ranking last year was the AMP Capital Corporate Bond Fund, returning 11 percent.

AMP Capital Investors Ltd., Macquarie Funds Group and BT Investment Management Ltd. said last month they were betting on the bonds of Australia’s banks in 2013 after leading returns among the nation’s debt managers in the fourth quarter.

The extra yield investors demand to hold corporate bonds instead of government debt in Australia shrank to 1.44 percentage points this week, the narrowest spread since December 2007, the Merrill Lynch indexes show.

Bovingdon also runs the Altius Bond Fund, which returned 8.8 percent last year to rank No. 12 out of 22, based on the Morningstar figures, which are all after fees.

He was head of fixed income at Aberdeen Investment Management Australia Ltd. from 2007 to 2009 and held the same position at Deutsche Asset Management Australia Ltd. from 1999 to 2007, he said.

Providing Safety

Strategic Fixed Interest will still seek to provide safety and low volatility, Bovingdon said. Ninety-two percent of its assets were in top-level AAA debt ratings on Dec. 31.

The fund is different because it doesn’t track or try to beat a benchmark. That means it can extend into longer-term securities when interest rates may fall or buy shorter-term debt when rates may rise.

“It’s benchmark unaware,” Bovingdon said. “There’s certainly some pain to be had if you become beholden to benchmarks” while yields rise, he said.

Australian Unity had been using joint-venture partner Vianova Asset Management to run the portfolio and appointed Altius after three Vianova officials quit last year.

Assets Tumbled

Assets tumbled to A$397 million in November after Australian Unity announced in October that Michael Schneider, Vianova’s chief investment officer, had resigned. Michael Swan, Vianova’s senior portfolio manager, and Gareth Apsey, the operations manager, later did the same, Australian Unity reported on its website in November.

The fund shrank to A$113.8 million by year-end, the Bloomberg data show.

“It likely would have underperformed the broad market index last year regardless of the manager change,” said Tim Murphy, co-head of fund research at Morningstar in Sydney. “This fund’s approach has always been a cautious one. Most of the outflow was a result of the management change.”

All three would continue in their current roles at Vianova until the resignations took effect, which would happen in April for Schneider and in May for Swan and Apsey, according to Australian Unity. Swan said nobody at Vianova would comment, speaking by telephone yesterday.

RBA Outlook

Traders see a 69 percent chance the RBA benchmark will be 2.75 percent or lower by mid-year and a 39 percent chance it will be 2.5 percent or less by August, according to swaps data compiled by Bloomberg.

Australia’s 10-year yield may rise to 4 percent by June 30, while U.S. yields may climb to 2.5 percent from 2.02 percent, Bovingdon said. For investors who bought today, Australian bonds would lose 1.7 percent after accounting for interest, and Treasuries would hand investors a 3.3 percent decline if the forecasts are correct, according to data compiled by Bloomberg.

The South Pacific nation’s economy probably grew 3.5 percent in 2012, the most since 2007 before the global financial crisis struck, based on a Bloomberg News survey of economists. The government reports fourth-quarter gross domestic product on March 6.

The U.S. Federal Reserve said Jan. 30 it will buy about $85 billion of government and mortgage securities a month to support growth. Minutes of the Fed’s Dec. 11-12 meeting showed members divided between a mid- or end-of-year finish to bond purchases.

Stimulating Growth

The Reserve Bank said yesterday in minutes from its Feb. 5 meeting that there are indications that lower interest rates are starting to spur the economy, while it reiterated there is scope to cut further if needed.

Strategic Fixed Interest won’t take on as much risk as the Altius Bond Fund, Bovingdon said.

“It may have some more credit added to it, and we are looking at opportunities, but it won’t have anything like the same kind of appetite for credit that the Altius Bond Fund has,” Bovingdon said. “You wouldn’t expect it to perform the same as the other fixed-income funds in that universe because it’s very much focused upon capital preservation, high quality, low volatility.”

Before it's here, it's on the Bloomberg Terminal.