A new Morningstar white paper has shown that since 16 March, managers including Kapstream, Vanguard, iShares, AMP Capital, Janus Henderson, Franklin Templeton, Legg Mason, Pendal, Schroders, Bentham, UBS, Perpetual and Macquarie have all moved to raise the spreads on their bond funds as the market shows signs of dwindling liquidity.
The buy sell spreads are costs that investors pay when they enter or withdraw from a fund, usually expressed as a percentage of the unit price.
Raising the spread is intended to treat all unitholders equally, as ongoing investors could otherwise bear the heightened transactions costs incurred from liquidating bonds.
While the worst time to liquidate an investment is at the height of uncertainty during a meltdown, Morningstar noted investors may want to rebalance their portfolio with reallocation out of fixed interest or they may need cash to manage their personal circumstances.
“There is no easy answer to this issue. Fund managers are obligated to treat their unitholders equally, and the current circumstances are almost without precedent,” Morningstar said.
“In the meantime, actions by central banks to lower interest rates and inject liquidity into the financial system may ease conditions materially; it’s entirely possible that these higher sell spreads prove transitory.
“Having said that, this period has thrown a curve ball on conventional wisdom about the liquidity of even the highest grade bonds and portfolios that invest in them. It’s also fair for investors to seriously question the actions of managers levying especially high sell spreads relative to other funds plying similar strategies.
“Unfortunately, fund managers that have raised their sell spreads by large margins have made it much more difficult for their investors to manage their portfolios.”
Australia is not alone, sell spreads on some credit funds in Europe were reported to have increased from 1 per cent to 1.5 per cent.
Most of the managers recorded in the new Morningstar list run Australian bond strategies.
At the upper end of local-focused products, AMP Capital Wholesale Australian Bond was seen to levy a 0.9 per cent sell spread, from its previous 0.1 per cent. Vanguard Australian Inflation-Linked Bond Index Fund issued the same spread and Schroder’s Fixed Income Fund followed at 0.75 per cent, up from 0.12 per cent.
Pendal Fixed Interest Fund was the lowest at 0.25 per cent, previously 0.06 per cent.
On the products with global bonds, Macquarie Dynamic Bond’s spread of 1.24 per cent, up from 0.08 per cent was much higher than most, with Vanguard’s Global Aggregate Bond Index Fund (Hedged) following at 0.76 per cent, previously 0.13 per cent.
Vanguard stretching particularly high, report says
Vanguard and UBS were said to have increased their sell spreads significantly, with Vanguard’s Global Aggregate Bond Index Fund (Hedged) spread of 0.76 per cent being significantly higher than direct passive competitor iShares Global Bond Index’s 0.4 per cent and active manager Legg Mason for its Western Asset Global Bond Fund (0.12 per cent) and Brandywine Global Opportunistic Fixed Income (0.15 per cent).
“Vanguard has additionally cited higher currency hedging costs for its decision, but all of these portfolios are currency hedged,” the Morningstar analysis stated.
“Vanguard’s move is even more striking as it contains far less emerging markets debt than the portfolios run by Western Asset and Brandywine, and this segment has unsurprisingly been under particular stress.
“And similar to what we saw in Australian bonds, the government-related Vanguard International Fixed Interest Index Fund now levies a sell spread above more sectorally diverse strategies. That said, other managers, including Schroders, have stated that liquidity on Australian government and semi-government bonds has dried up significantly, noting that bid/ask spreads on these securities up to 20 times wider than how they normally trade.”
The report also noted Vanguard is charging a higher spread for its Australian Corporate Fixed Interest Fund, compared to its International Credit Securities Index Fund (Hedged) at 1.72 per cent versus 1.17 per cent, suggesting that it is finding the domestic market particularly illiquid.
But, Morningstar noted, the strategies lifting spreads the most are not overtly skewed to Australian credit.
In credit and flexible bond strategies, Kapstream’s Absolute Return Income Plus Fund raised the bar to 2 per cent, followed by Payden Global Income Opportunities Fund at 1.95 per cent.
Vanguard Australian Corporate Fixed Interest Index (1.72 per cent), Franklin Australian Absolute Return Bond Fund (1.75 per cent) and UBS Income Solution Fund (1.5 per cent) were all also at the upper end of the spectrum.
PIMCO Australian Short Term Bond made the smallest increase, lifting its spread to 0.35 per cent.
