Fixed income losses painful

The latest MJW Investment survey for the 2016 December quarter offers a stark contrast to what many investors will have grown accustomed to.

Monday, January 23rd 2017, 11:50AM

by Owen Poland

The most significant feature was the losses sustained by fixed income investors as bond yields were repriced higher. Most notably, the S&P/NZX NZ Government Stock index fell 3.4% over the quarter while the Bloomberg Barclays Global Aggregate index gave up 2.0% (hedged to the NZ dollar).

While yields had been rising since mid-year, Donald Trump's surprise election victory spurred a rally that saw the US 10 year Treasury yield climb from 1.8% on November 7 to its most recent peak of 2.6% on December 15 - a 40% increase in just six weeks.

The fixed income losses may be painful, but MJW analyst Nitya Lakshmanan says longer term results remain healthy given that domestic and global bond indices have returned 5.5% pa and 7.1% pa respectively over the last three years - well above the 3.1% result from cash. "We may well be at a turning point for yields but the bond bears should hold off their gloating just yet."

Another notable reversal of an established trend in the December quarter was the relative performance of the New Zealand and Australian equity markets which saw the Kiwi market give up a significant proportion of previous gains while the Aussie bourse rebounded strongly. The annual returns for both markets were around 10 per cent, though the NZX remains ahead of the ASX by almost 10% over the past three years.

In currency terms, global share markets performed well over the quarter. The U.S. S&P 500 gained 3.3%, however Japan's Nikkei 225 was the standout with a rise of 16.2% as investors cheered the Bank of Japan's accommodative monetary policy. Even Mainland Europe posted healthy gains with France up 9.3%, Germany 9.2% and the UK 3.5%.

Despite the strong returns from global equities, most KiwiSaver Funds produced weak results for the quarter. Net of investment fees, growth funds showed a median return of just 0.8%, while the median conservative fund fell 0.7%.

For growth funds, MJW says the weak results were predominantly driven by home-country bias in share portfolios. For example, Milford’s Active Growth fund (which has 58% in domestic shares and just 10% in global shares) fell 0.9% over the quarter, though Milford is first in its group over five and nine year periods.

The losses recorded by conservative funds reflect the generally large weightings to fixed income where the average allocation to bonds is a sizeable 57%. The top performing conservative fund this quarter was AMP – Default, which has almost 50% of its assets in cash.

Looking ahead, MJW sees plenty of uncertainty as policymakers navigate a more complex, divergent and fragile global economy and it says the best response to uncertainty is to ensure that one’s portfolio remains robust to a wide range of market outcomes. "Will we continue to see the animal spirits that surfaced in the latter part of 2016, or will there be another downtick in sentiment and a retreat to safe-haven assets?"

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