The rally in sovereign bonds over recent months appears to have caught out bond managers who are positioned with lower rate duration than the benchmark, according to SQM Research.
SQM Research released its 2015 Fixed Income Sector Review yesterday, which highlighted the 'healthy' bond returns across the spectrum that have been driven by low central bank policy rates, quantitative easing, weak global growth and low inflation.
Looking at performance over the last year, domestic bonds returned 6.69 per cent to investors, global bonds rose 6.4 per cent, global sovereign bonds were up 7.11 per cent and global credit returned 4.91 per cent.
Three returns were also strong and more tightly grouped, ranging from 5.14 per cent for domestic bonds to 6.24 per cent for global credit, said SQM Research.
But the reignited rally in sovereign bond yields has been a 'headwind' to the managers who are positioned with lower rate duration than benchmarks such as the Bloomberg AusBond Composite Benchmark or the Barclays Global Composite, said SQM.
"This is not a small cohort as many fixed income investors have for some time now considered sovereign yields to be 'expensive' on a variety of metrics.
"The prevalence of underweight duration positioning largely explains the under-performance of the index-benchmarked peer group," said the research house.
Indeed, the AusBond Composite Benchmark returned 5.36 per cent over the past year – below domesetic bonds, global bonds and sovereign bonds.
"In a similar fashion, the sharp rise in credit spreads has materially impacted returns for funds targeting the cash rate as a benchmark," said SQM Research.
"In this instance, the benchmark has effectively zero duration to both rates and credit spreads. As a generalisation, many managers in this cohort will tend to have more spread duration than they have rate duration.
"The negative impact on returns from credit spread increases can tend to overwhelm benefits from falling government yields, as there is less exposure to that rally."
The SQM Research universe of bond funds received between 3.75 (favourable) and 4.5 (outstanding, suitable for inclusion on APLs) in the review.
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