Fledgling Millinium’s Eye on Yield Tops Ranks: Australia CreditBenjamin Purvis
Mark Phillips’ Millinium Capital Managers Ltd. only started its bond fund three years ago and is already topping rankings by focusing on yields rather than capital gains.
Phillips, who began his finance career in the north Queensland city of Townsville just before the 1987 stock market crash and is now based in Brisbane, delivered average annual returns of 13.3 percent from mid-2011 through June 2014, Morningstar Inc. data show. That’s 4.6 percentage points more than 128-year-old Perpetual Ltd., which runs the next-best fund in the ranking. The Bloomberg AusBond Credit index of corporate notes returned 7.6 percent a year over the period.
Millinium, which manages and advises on about A$120 million ($112 million) in fixed income, typically holds about 15 Aussie dollar-denominated corporate bonds and doesn’t follow a benchmark, Phillips said. While the global credit rally helped it outstrip rivals because it chose not to hold government bonds, the fund’s main focus is to provide steady income of about 6 percent, using predetermined selling points to limit capital losses.
“Build portfolios that give you good regularly consistent returns, don’t lose any money, that’s all we’re trying to do,” Phillips, 50, said in an interview at Bloomberg’s Sydney office. “We’re not trying to get alpha, we’re not trying to get the best performance, we’re not trying to work out which bond or which instrument is going to outperform something else.”
Father-of-two Phillips grew up in Townsville and began working for Westpac Banking Corp. there in the weeks before the “Black Monday” crash roiled global markets in October 1987. He soon moved to Darwin and shifted into wealth management before taking on a role there with National Australia Bank Ltd.’s funds business.
From 2002 to 2006 he worked for MFS Ltd., an investment company based on Queensland’s Gold Coast that collapsed in 2008. He and two partners established Millinium in 2006, with the company mainly involved in corporate transactions rather than funds management in its earlier years.
Millinium has been overseeing equity funds since 2009 and started managing bonds in 2011. It currently advises on or manages about A$580 million in funds across asset classes. Phillips’ fixed-income team comprises himself, another money manager and an analyst. He expects to add two more people within 12 months.
He uses quantitative models to narrow down the potential portfolio to a ranked list of about 30 bonds, with the manager then selecting about half of those to own.
“The majority of the focus is actually on the credit,” said Phillips. “What the quant screen does is it takes out all the stuff that we don’t want.”
Millinium’s present portfolio includes notes issued by insurers Swiss Re and Axa SA, regional lender Bendigo & Adelaide Bank Ltd. and JEM Southbank Pty., a financing vehicle for educational facilities in Brisbane. It also holds floating-rate securities issued by National Australia Bank.
While sell price targets determined for each security at the time of purchase reduce potential capital gains, they also mitigate the risk of losses, according to Phillips.
“We don’t necessarily focus too much on the upside, we actually focus on downside risk,” he said.
Phillips has largely avoided buying recent new issues in the primary market, opting instead to purchase bonds sold by other money managers as they make room in their portfolios.
Such paper also has the advantage of being shorter-dated, allowing him to cut the average duration of his holdings to reduce the risks posed by a rise in interest rates. Duration is a measure of how sensitive a bond’s price is to changes in yields.
The manager has also been gravitating from fixed-rate to floating-rate paper to mitigate such risks, Phillips said.
The portfolio’s average modified duration was “very short” at about 1.3 years as of Aug. 22, while its effective maturity was 2.9, he said. The manager doesn’t target any particular duration and the current level is more of a byproduct of its bond selection methods.
The debt that Millinium owns must be denominated in Australian dollars, carry investment-grade credit ratings and have a maximum modified duration of six years, according to Phillips. The fund tracked by Morningstar is Millinium’s A$36 million wholesale trust, he said.
In addition to being the best performer over three years, Millinium has also garnered the biggest gains in the 12 months through June, returning 11.7 percent, Morningstar data show. Perpetual handed investors 8.7 percent over three years and 7.5 percent over the single year to take second place over both time frames. The Goldman Sachs Core Plus fund ranked third in the period since mid-2011, while AMP Capital’s corporate bond fund was the third best over one year.
Phillips said the Reserve Bank of Australia, which has held its benchmark interest rate at a record low 2.5 percent for more than a year, will probably start raising interest rates in the second quarter of 2015.
The median estimate of economists surveyed by Bloomberg is for the first increase in the third quarter of 2015, while swaps markets show traders are pricing in almost no chance of a change over the next 12 months, according to a Credit Suisse Group AG index. The rate on two-year Australian government bonds was 2.6 percent as of 12 p.m. in Sydney.