Transcription of Finance News Network Interview with Antares Fixed Income Portfolio Manager, Mark KielyLelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today from Antares Fixed Income is Portfolio Manager, Mark Kiely. Mark welcome.
Mark Kiely: Pleasure to be here.
Lelde Smits: Antares manages about $18 billion in cash and fixed income investments. What opportunities have local fixed interest markets generated over the last six months?
Mark Kiely:There’ve been lots of opportunities for fixed investments over the last six months. One of the big opportunities actually has been in long duration portfolios, where we’ve seen rates have actually fallen substantially over the last six months. As an example three year Government bonds have fallen from around about 3.5 per cent to two per cent and actually traded below two per cent, in May 2012.
The other big area where fixed interest portfolios actually made excess returns has been in credit. There’ve been lots of opportunities in credit and generally credit has performed fairly well, although there has been some volatility in credit. We saw credit spreads widen back in April and May, which did detract from some of the excess returns from credit carry but generally over that period, we have seen good return from Australian physical bonds invested into corporate issuers.
Lelde Smits: And Mark, what is your outlook for interest rate movements over the next six to 12 months?
Mark Kiely: Over the next six to 12 months, I wouldn’t be surprised if we see the Reserve Bank ease cash rates by a further 50 to 100 basis points. The US is basically at the moment growing closest to us between one to 1.5 per cent, Europe - many regions are in recession and Australia no prospect of near term growth improvement. China is running close to 7.5 per cent growth and if that continues, then Australia will be dragged down with regard to this growth dynamic.
Lelde Smits: And what impact does a falling rate environment have on generating returns?
Mark Kiely: A falling rate environment means that the current carry in yield investments is going to be lower, because structurally rates are now lower. But looking backwards we’ve had a great capital appreciation as those rates have lowered down. Looking forward the carry will be less, but there is a chance that we may see further capital appreciation should rates continue to lower further. The scenarios that may eventuate is a continuation of weak growth in China, which would flow on to the Australian growth dynamic, a continuation of easing’s in the Australian market place.
Both of those would lead to lower rate structures in Australia and capital appreciation, enhancing the yield from a fixed interest portfolio. The opposite of that is if rates do backup there could be some negative impact on capital prices of longer term bonds.
Lelde Smits: And against this backdrop, how have your funds performed?
Mark Kiely: Our flagship core all maturity fixed Interest portfolio has returned 8.09 per cent over the 12 months to August, so that’s about 41 basis points over its benchmark which is a UBS Composite Bond Index. Our flagship core zero to three portfolio has returned about 6.09 per cent, which are about 22 basis points over the zero to three UBS Composite Bond Index. And then our enhanced cash trust product has performed 5.09 per cent, which is about 67 basis points over its benchmark which essentially is a bank bill index, or cash like benchmark. So all our funds have performed positively both in absolute returns and also in excess returns, related to their underlying benchmarks.
Lelde Smits: The last six to 12 months have seen an increase in corporates issuing hybrids. Have these securities also been purchased by institutional investors such as yourselves?
Mark Kiely: We at Antares Fixed Income have not purchased hybrid securities and I expect a lot of our peers also haven’t been big buyers of hybrid securities. That market has essentially been a retail offering market and I’d actually argue that I think a lot of the retail investors, potentially are not fully aware of both the risks and how to price the risk within hybrid securities.
Lelde Smits: To the local corporate bond market. What is the size and quality of paper on issue?
Mark Kiely: The Aussie dollar corporate bond market has about 90 billion worth of fixed securities on issue, and about 100 billion of floating rate securities on issue. Now if you can better the total fixed market that we also offer investors to invest into, there’s about 600 billion on issue in the fixed interest market alone. So the corporate bond market at 90 billion in the fixed interest space only, represents less than 15 per cent of total bonds on issue.
Lelde Smits: So what is the range of yield and how does that margin compare historically?
Mark Kiely: The range of yield varies depending upon the issuer. Major Banks which are one of the largest issuers in the corporate bond market as an example, in the five year public curve in trade about 1.3 per cent over swap. That’s 1.9 per cent over equivalent government bonds, or in absolute yield terms, about 4.5 per cent. Now those yields are substantially below what we saw only six months ago, because rates have actually fallen and also margins on corporate bonds have also compressed.
Going forward, I would expect that those margins would probably be retained if the Australian economy holds up. But there are some scenarios whereby we may see some widening of credit spreads, given that we are now approaching our historical tights of the last say, six to eight months.
Lelde Smits: What is the split between local and offshore issuance among Australian corporates and what will change this?
Mark Kiely: Unfortunately many of the Australian corporates still issue offshore particularly into the US market. The other alternative source of funding is the bank loan market, so unfortunately we don’t see nearly as much composite, we as investors, would like to see come into the Australian marketplace. What may change that going forward is that regulation changes with regards to Basel III may mean that capital requirements for banks that need to hold - that needs to be held against corporate loans, are higher; which may incentivise the banks to actually promote extra issuance into the marketplace, which may help facilitate greater bonds being ventured into the Australian marketplace. This would be a great thing for Australian investors to get a greater access to more corporate issuance.
Lelde Smits: Finally Mark. Should rates fall over the next year, where do you expect retail investors will look for yield?
Mark Kiely: Well retail investors obviously have been large participants in the retail term deposit market. Over the last six months we’ve seen rates in the retail term deposit market fall; say from circa six per cent to where they currently are now at around five per cent. Further easing’s of the Reserve Bank cash rate; I would expect to find that td’s (term deposits) will continue to fall down in line with easing’s in the Reserve Bank cash rate.
Where will these retail investors look for alternative sources given that fallen td yield environment? Well obviously one that they have been channelling a lot of their money into has been hybrids. And as I’ve spoken about, I don’t believe that is the appropriate source to chase a higher yield environment. I think the reality is that we are moving towards a lower yield environment and maybe that’s got to be part of the psyche that investors now need to think about, going forward.
Lelde Smits: Mark Kiely, thanks for the update.
Mark Kiely: It’s been a pleasure, thank you.
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