A Morningstar report found since mid-March, managers including AMP Capital, Janus Henderson, UBS and Perpetual had all moved to raise the spreads on their bond funds as the market showed 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 meant to treat all unitholders equally, as ongoing investors could otherwise bear the raised transactions costs incurred from liquidating bonds.
But Jamieson Coote Bonds has criticised fixed income managers for making the move, saying the coronavirus pandemic “was not a secret” and had steadily been developing through February and into March.
The company’s chief investment officer Charlie Jamieson commented pre-crisis, economic growth had slowed, the US Treasury yield curve had inverted from May to October last year and corporate credit had showed signs of liquidity stress, “signalling danger and the potential for recession”.
But, he commented, many managers had loaded up on “low quality or illiquid securities” in the lead up to the crisis instead of bolstering the defence for their portfolios.
“There was ample time for experienced fixed income managers to improve the liquidity profile of their portfolios and sell some of the low quality and illiquid assets that they had purchased in order to chase extra yield,” Mr Jamieson said.
“Unfortunately, with other managers having not done so at the right time, this has left investors to pick up the pieces – as the performance of what should be the most defensive part of their portfolio suffers.
“In our opinion, the sell side spread widening is an alarming development and warrants some serious discussion. Investors should be looking underneath the bonnet and asking their fixed income managers just how much low quality credit their funds hold, have they strayed from the mandate, are they really true to label?”
He added investors allocate to bonds for portfolio stability, and their investment should be robust when they need it the most.
“Many recent articles on sell spreads have not mentioned any of the fixed income investment managers who had not changed their buy/sell spreads at all during this time and are functioning as promised − having not changed the goal posts mid-game when their investors needed them most,” Mr Jamieson said.
JCB has said it remains well positioned to service investor redemption requests without raising its sell spreads, having already done so over the past month despite the high volatility environment.
Mr Jamieson said investors need to be wary of how liquid and defensive their fixed income exposures are as it can have a “substantial impact on performance”, particularly in times of market stress.
“In times like these, asset quality and liquidity matters more than ever,” he said.
“High-grade sovereign bonds have historically defended and protected when needed – we have seen that play out in previous sustained bear markets and we believe they will continue to be a genuine store of wealth in highly uncertain times.
“We firmly believe that the industry must address these fit for purpose questions around what is truly defensive in what has become the second major sequencing event in 12 years.”
