Duration, a measure of interest-rate risk, was a large driver of returns in 2010 on the back of the risk concerns over the European sovereign debt crisis, according to a Standard & Poor's (S&P) report released yesterday.
S&P Fund Services' "Australian Fixed Interest Sector Report" said many managers held a short-duration bias throughout the year in an environment in which bond prices actually rallied due to the risk aversion associated with European sovereign debt concerns.
"For those that maintained their short position, the market eventually came back, enabling a recovery in their position," S&P Fund Services analyst David Erdonmez said.
"Earlier losses were made up through the fourth quarter when rates began to reflect a more positive economic outlook."
Duration addresses interest-rate fluctuations. In general, the bigger the duration number, the greater the interest-rate risk or reward for bond prices.
While duration was a more prevalent driver of returns this review cycle, being overweight credit continued to be a dominant theme, S&P said.
Active managers were underweight the treasury component of the composite bond index in favour of credit, it said.
However, it said it was highly likely this would continue to be the case, particularly if covered bonds came online as a new means of targeting AAA-rated credit quality with a spread above government bonds.
"We also noted in our review that the competitiveness of cash funds continues to be questionable given the current pricing of 'at call' accounts and term deposits by Australian banks," Erdonmez said.
"In addition to competitive yields, a large number of depositors fall under the government guarantee for retail deposits. While cash management trusts offer many features, given the high fee levels, investors are receiving a benchmark return minus the better part of 100 basis points for the privilege."
