Zenith’s 2012 Fixed Interest Sector Review, released on Friday, looked at 121 funds – of which only 59 received a rating.
The remaining 62 funds either chose to withdraw themselves from the ratings process or were not rated by Zenith.
Of the rated funds, five received a ‘Highly Recommended’ rating, 44 were ‘Recommended’ and 10 received the new rating of ‘Approved’.
The five funds to receive the highest rating (all of which are actively managed) were the PIMCO EQT Wholesale Australian Bond Fund, the Schroder Fixed Income Fund – Wholesale Class, the Tyndall Australian Bond Fund, the AMP Capital Corporate Bond Fund – Class A Units, and the PIMCO EQT Wholesale Global Bond Fund.
In its review of the sector, Zenith looked into the potential impact of inflation on fixed interest portfolios.
“Should interest rates rise this would lead to falls in bond prices and subsequent capital losses, which would be borne at the portfolio level,” said the Zenith report.
While the fund managers involved in the review did not fear an outbreak of inflation (at least in developed countries), they listed four different strategies to deal with the threat.
“One such strategy is an outright ‘short’ duration trade and this is more likely to be enacted where there is an expectation that market rates will rise in response to inflationary pressures,” said the report.
Zenith has also noted a greater tendency among managers to maintain neutral duration management across their portfolios.
Other strategies to cope with the threat of rising inflation include an increased exposure to credit, a wider country spread, and the increased use of inflation-linked bonds and floating rate notes, according to Zenith.
Investors also need to be alert to the factors that could cause fixed interest benchmarks to head skywards, said the report.
“Zenith believes that further issuance of Commonwealth government bonds may be observed in the near term as the Commonwealth government seeks to raise funds to meet future obligations, while also taking advantage of lower market rates,” said the report.
This could cause an increase in the duration and composition of the UBS Composite Bond Index (which is commonly used as an Australian fixed interest benchmark) – an event that is likely to send interest rates upwards, according to Zenith.
