FIIG - The Fixed Income Experts

MIPS Portfolios vs the FIIG Australian Bond Fund
(The Fund)

What is the FIIG Australian Bond Fund?

The Fund comprises exposure to a highly diversified pool of Investment Grade (IG) government, semi-government, corporate and bank debt, including exposure to Asset-Backed Securities. Simplistically, it is a ‘longer duration’ version of the Conservative Income Investment Program, structured in Trust form. Investors considering switching from the MIPS Investment Programs into the Fund should consider the fee reduction, diversity improvement and liquidity advantages, alongside consideration of whether a longer duration profile fund suits their investment horizon.  

Investment Management Team

The same team manages both MIPS Investment Programs and the Fund. This same investment strategy is applied to setting both duration and credit exposure. The application is ratio based. When the Fund is ‘long’ duration, the tenor risk extension will be ratio longer than its benchmark index. The same ratio would be implemented for the MIPS Investment Programs that are benchmarked against shorter duration indexes.

HTML Table with Merged CellsComparison of Fees

Fee

FIIG Australian Bond Fund

MIPS Conservative Income

MIPS Core Income

MIPS Income Plus

Management Fee
0.58% p.a
0.54% p.a 
0.54% p.a 
0.64% p.a
Custody and Administration Fee
NA
First $5m 0.11% p.a
Over $5m 0.06% p.a

The FIIG Australian Bond Fund has the lowest overall fee structure as it’s a managed investment scheme where the management fee of 0.58% p.a. includes custody, administration fee and all fund-related costs. This makes it a good option for investors who are looking for a low-cost, diversified Australian bond fund.

Investment Objective Comparison

Summary:

  • Both the Fund and all MIPS Investment Programs seek to provide investors with capital stability, income and total returns in excess of their respective benchmark indexes.
  • All programs will experience volatility. The Fund and Conservative Income credit volatility is the lowest. The Fund interest rate direction volatility is highest given its benchmark duration. Minimum investment horizon guides are three years for the fund and Conservative Income and three to five for Core Income and Income Plus.
Investment OptionInvestment Mandate (IM) design and key differences

FIIG Australian Bond Fund

The IM permits IG exposure only.

  • Has exposure restrictions to low IG rated (BBB) assets.
  • Current yield target of between 5.25% and 5.75% p.a.

Benchmarked to Bloomberg Composite (0+) years Index.

  • A duration of 5.00 years.

Is structured as a Trust and investors own units in the trust.

  • Highest diversity and liquidity

MIPS Conservative Income

The IM permits IG exposure only.

  • Has generous low IG rated (BBB) asset exposure limits.
  • Current yield target of between 5.25% and 5.75%.

Benchmarked to a 50/50 Blend of two S&P/ASX Indices:

  • 50% BBB Corporate Band Rating
  • 50% AFI 1-5 year
  • Blend duration of 3.36 years

Is structured as an Independently Managed Account (IMA)

  • Maximum diversity a function of account size divided by minimum parcel size ($10k)
  • Liquidity lower than trust (see liquidity discussion).

MIPS Core Income

The IM permits Non-IG and Unrated (UR) exposure.

  • Maximum 25% NIG and UR (senior only) limit
  • Current yield target of between 5.75% and 6.50% p.a.

Benchmarked to a 75/25 Blend of two S&P/ASX Indices:

  • 75% BBB Corporate Band Rating
  • 25% AFI 1-5 year
  • Blend duration of 3.66 years

Is structured as an IMA.

  • Maximum diversity a function of account size divided by minimum parcel size ($10k)
  • Liquidity of NIG & UR assets lower than for IG assets
  • Liquidity lower than trust (see liquidity discussion).

MIPS Income Plus 

The IM permits Non-IG and Unrated (UR) exposure.

  • Maximum 75% NIG and UR (senior and subordinated)
  • Current yield target > 6.50% p.a.

Benchmarked to S&P/ASX BBB Corporate Band Rating

  • Blend duration of 4.03 years

Is structured as an IMA.

  • Maximum diversity a function of account size divided by minimum parcel size ($10k)
  • Liquidity of NIG & UR assets lower than for IG assets
  • Liquidity lower than trust (see liquidity discussion).

 

Risk, diversity and liquidity:

Risk

 

The FIIG Australian Bond Fund and the MIPS Conservative Income program are both 100% exposed to Investment Grade assets only, which means that they carry low level risk of default. However, the Fund, being benchmarked to the Bloomberg Composite Index, which is dominated by AAA to AA-rated government debt, alongside restrictive lower-rated Corporate IG limits, has the absolute lowest level of default risk of the two options.

 

Core Income (25% NIG & UR limit) and Income Plus (75% NIG & UR limit) have respectively higher levels of risk of default. That risk is somewhat mitigated by maximising diversity but recent historic performance of the NIG and UR sector is not encouraging. This has led the PMT to aggressively reduce exposure to the NIG and UR sectors to approximately one third of limit over the last four years.

 

The FIIG Australian Bond Fund is more diversified than a MIPS portfolio as it holds more than 50 bonds. This reduces concentration risk and makes the FIIG Australian Bond Fund a more diversified portfolio.

 

Diversity

 

The Fund is able to achieve the highest level of diversity because it deals in wholesale markets and is not restricted by Direct Bond parcel size. We elaborate here below. Diversity is a key risk mitigate. Additionally, lower risk assets exhibit the highest liquidity. Consequently, Conservative Income will exhibit higher liquidity than Core Income and Income Plus because, although structured using the Direct Bond service, its exposure is to IG assets only.

 

Liquidity

 

Without internal (MIPS and FIIG ex MIPS) aggregation, or internal re-allocation within MIPS, Direct Bonds are illiquid as by definition they are a subset parcel size of the $500k FV minimum volume that can be transacted in wholesale markets.

 

  • The illiquidity is elevated for Core Income and Income Plus Accounts because those Investment Mandates allow lower grade and investments that of themselves have a smaller pool of wholesale market interest.
  • Trust holding minimum parcel sizes are $500k and therefore the Fund can raise liquidity in wholesale markets.

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Brad Sheehan - Director Corporate and Institutional Natalie Wilding, Director - Fixed Income Jon Sheridan - Director, Fixed Income & Investment Strategy Tom Guest, Director - Fixed Income Garreth Innes - Director - Fixed Income  

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