We build portfolios with diverse sources of returns
Exploring fixed income investments in Australia, our specialist team aims to generate performance through uncorrelated sources. We believe this approach provides a greater scope for successfully meeting investment objectives and generating attractive risk-adjusted returns.
An allocation to Australian fixed income can help preserve capital during periods of weakness in equities and other growth asset classes. Many well diversified portfolios maintain meaningful allocations to bonds. As well as their defensive characteristics, bonds earn regular income and typically provide higher yields than bank deposits.
Why invest with us?
First Sentier Investors offers a range of both active and passively managed strategies, primarily focused on domestic bond markets.
Our expertise extends across the full fixed income spectrum, encompassing traditional government bonds, credit and inflation-linked strategies. We also have the expertise to run ‘passive enhanced’ style portfolios and have a proven ability to generate above-benchmark performance outcomes in this space.
As well as managing established unit trusts, we have a proven ability to manage bespoke, segregated mandates that are tailored according to clients’ individual requirements and objectives.
FirstSentier Investors is among the largest and most experienced managers of Australian-based fixed income solutions.
We are able to source a variety of investment opportunities both within Australia and overseas, utilising the insights of specialist resources in the world’s largest bond markets.
A ‘balanced risk’ approach seeks to diversify performance drivers and generate consistent outperformance through the full market cycle.
Our portfolios are unconstrained by a ‘house view’ – managers have the discretion to utilise a range of varied and uncorrelated performance drivers.
We seek to deliver long-term excess returns, but have an over-arching emphasis on protecting capital.
Best-in-class ESG integration: we consider environmental, social and governance indicators alongside traditional indicators of financial performance.
Head of Australian Fixed Income
The power of active management
By ensuring that portfolios are built in a balanced and diversified manner – where no individual risk position or view has the ability to dominate the return profile – we increase the likelihood of delivering on stated portfolio objectives.
This aims to provide investors with better risk adjusted returns over time. Critically, ‘balanced risk’ does not imply low risk. Our investment process is equally applicable to both high return and lower risk, passive enhanced style portfolios.
Portfolios can be positioned to benefit from anticipated directional movements in bond yields. Changes in economic conditions and interest rate expectations typically affect bond yields – our in-house research is therefore focused on economic indicators and the identification of trends.
We can position portfolios to benefit from anticipated movements in the shape of bond yield curves, both within Australia and in selected overseas markets. Yield curves rarely remain static for long and movements provide opportunities for active managers to exploit.
Evolving inflationary pressures affect inflation-linked bonds. We are able to implement active positions in this area of the market to benefit from anticipated trends.
There are more than $100 billion of corporate bonds on issue, from Australian companies and offshore entities that have chosen to issue debt in AUD. We are able to gain selective exposure to high quality issuers, whose bonds provide higher yields than comparable government securities.
Sovereign, supranational and agency bonds (SSA's)
As well as the Commonwealth Government, other government-related entities can issue AUD debt. The yields on all of these securities can fluctuate due to a range of market forces. Accordingly, we seek to add value by implementing active exposures in these areas of the market. See an example of how in this case study.
Some of our portfolios are able to benefit from movements in global government bond markets relative to one another.
Active opportunities in State Government securities
Bonds issued by State Governments in Australia typically offer yields that are above comparable securities issued by the Commonwealth Government. The amount of extra yield can vary over time. When well timed, buying or selling State Government bonds can therefore generate additional returns for actively managed portfolios.
State Government bond spreads - the additional yield offered over and above comparable Commonwealth Government securities
For illustration purposes only. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors portfolios at a certain point in time, and the holdings may change over time.
Source: Bloomberg and First Sentier Investors as of 30 June 2020.
Questions your client might ask about investing in fixed income
What is the benefit of fixed income?
Fixed income can help diversify a portfolio, reducing volatility when compared to growth assets like property and shares, while providing a higher return than cash. Fixed income can also provide a regular income with relatively low risk and high liquidity.
How do fixed income funds work?
Fixed income funds own securities selected by a professional fund manager. Most bonds pay interest, or ‘coupons’, enabling funds to make regular distributions to investors.
Are fixed income funds safe?
While all investments carry risk, fixed income is considered a defensive asset class, and typically carries less risk than growth assets like property and stocks. There is a spectrum of risk within fixed income; from the safest government bonds through to high yield corporate bonds. A professional investment manager can help manage fixed income risk through diversification strategies and careful issuer selection.
What is a growth asset?
Growth assets are higher risk investments such as property, alternatives and shares, which tend to offer investors a higher return.
What is a defensive asset?
Defensive assets are lower risk investments such as cash and fixed interest, which tend to offer investors a lower return over the long term.
What is a ratings agency?
There are three major ratings agencies – Moody’s, Standard & Poor’s (S&P) and Fitch – that assess and publish views on bond issuers’ creditworthiness. Bonds are assigned ratings between AAA, the most financially secure, and D. Higher rated bonds are considered investment grade, while bonds with ratings that fall below BBB or Baa3 are considered high yield bonds.
Is a bond fixed income?
A bond is essentially a loan between an investor and an issuer, and is the most common form of fixed income. Fixed income can also refer to a broader spectrum of instruments that also operate on a fixed schedule of interest and principal repayments, such as mortgage-backed securities and bank loans. Fixed income funds are commonly referred to as bond funds.
What does the coupon mean on a bond?
A coupon is the annual interest earned from a bond based on its face value.
What are examples of fixed income?
Any investment where an issuer must repay a loan to an investor is considered fixed income. Fixed income assets such as government and corporate bonds require a borrower to repay the loan with interest in agreed increments. Fixed income can also include term loans, convertible notes and commercial mortgages.
What is a convertible note?
A convertible note is a type of fixed income that converts into equity, rather than repaying investors with the principal plus interest. For example, an investor may loan money to a business and receive equity in that business at the maturity of their loan.
What are the risks of fixed income?
All investments carry risk. While fixed income is considered a defensive asset class, there is a small chance that issuers may default on bonds, be unable or unwilling to make regular interest payments or fail to repay the value of the bond at maturity. While uncommon, defaults can result in permanent capital impairment. This underlines the value of diversification and having bond exposures managed by a professional investment manager.
Are high yield bonds more risky?
Borrowers that issue higher yielding bonds typically have a higher perceived risk of defaulting on repayments. As a result, yields on high yield bonds are typically higher than comparable investment grade securities – effectively compensating investors for the higher risk. Economic conditions and interest rate levels may also impact significantly on the value of all bonds, including high yield issuers.
What is credit risk?
The issuers of bonds or similar investments may not be able to meet their interest payments or repay their debt, which could lead to capital impairment. The risk may be greater for investments in bonds with low or no credit rating.
What is duration?
Portfolios can be positioned to benefit from anticipated directional movements in bond yields. Changes in economic conditions and interest rate expectations typically affect bond yields.
What is a yield curve?
A yield curve is an expression of market sentiment – specifically expectations of future bond yields. When similar securities with varying maturities are plotted on a line graph, a yield curve forms. We can position portfolios to benefit from anticipated movements in the shape of bond yield curves, both within Australia and in selected overseas markets. Yield curves rarely remain static for long and movements provide opportunities for active managers to exploit.
What is a normal yield curve?
A yield curve is an expression of market sentiment – specifically expectations of future bond yields. When similar securities with varying maturities are plotted on a line graph, a yield curve forms. Under normal interest rate conditions, a yield curve is upward sloping with yields on longer-dated securities higher than those on shorter-dated notes. This reflects the fact that the future is uncertain. Investors holding longer-dated bonds are therefore typically rewarded with higher yields to compensate for the higher risk.
What is an inverse yield curve?
A yield curve is an expression of market sentiment – specifically expectations of future bond yields. When similar securities with varying maturities are plotted on a line graph, a yield curve forms. When short-term interest rates are higher than longer term interest rates, the yield curve is downward sloping, or ‘inverse’. Movements in monetary policy and volatility can both cause short term interest rates to rise.
What is inflation?
Inflation refers to an increase in the prices of goods and services. Inflationary pressures impact various investments, including inflation-linked bonds. Some of our bond strategies are able to implement active positions in this area of the market to benefit from anticipated trends.
What is a country spread?
Some of our portfolios are able to benefit from movements in global government bond markets relative to one another. Positions can be established to capture anticipated outperformance of Australian bonds relative to the US counterparts, for example, or vice versa.
What is currency hedged share class risk?
Hedging transactions are designed to reduce, insofar as possible, currency risk for investors. However, there is no guarantee that the hedging will be totally successful and no hedging strategy can eliminate currency risk entirely.
Our corporate RI strategy is based upon three strategic pillars of quality, stewardship and engagement.
Within our Australian fixed income capabilities, the Environmental, Social and Governance (ESG) assessment impacts the internal credit rating (ICR) provided by the Credit Analysts via our Credit Research process. The portfolio management team then use this to assess relative value when compared to other similarly rated issuers. For example, ESG considerations in the automotive industry have led to our internal rating for some issuers being lower than that of the external rating agencies. As a result, the risk-reward assessment has often been decided such that we are underweight that sector in our active Australian fixed income portfolios.
Learn more about the Australian Fixed Income team's approach to Responsible Investment