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.
Income Plus (75% NIG & UR limit) has 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 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 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.