FIIG Australian Bond Fund Impresses on Debut

Kieran: Not really. Yes, we were long, and at peak length about half a year longer than the benchmark index. As we stated in our MIPS September 2023 Quarterly Report, the concurrent rise in yields and the evidence of continually falling inflation provided a compelling opportunity to finally go long for the first time in nearly three years. While there are some more intricate component contributions from the yield curve shape and timing of entry, the bottom line is we were long, and investors benefited greatly.

Adam: And all MIPS IMA investors benefited equivalently?

Megan: Yes. The Fund is the longest benchmark product, so it delivered the highest outright (or absolute) performance. MIPS IMA investors all achieved the same range of excess performance above their respective indices as they were also positioned ‘long’ duration.

Adam: Having reviewed the Fund Investment Mandate (IM) and your Investment Strategy disclosures and noting the Fund FUM launch date of 1 October, I imagine there were exposure compromises made. Can you elaborate?

Kieran: That is true. We deemed the Fund size not sufficiently large enough to invest in corporate debt at anywhere near IM levels. So, the Fund was dominated by Commonwealth and State debt exposure. While this diluted yield potential, we were not concerned. The quarter was dominated by the potential for duration to deliver excess returns, and getting long in the right part of the yield curve was the most important part of our investment strategy. Higher accrual returns can be pursued as the Fund grows, and we can concurrently achieve diversity targets. We suggest that we invest progressively in lower-rated investment grade assets as the Fund FUM grows in excess of $40m to generate higher returns. 

Adam: And what is your outlook for monetary policy, interest rate direction and corporate credit margins going into 2024?

Megan: Well, we have been clear since the third quarter of 2023. Monetary Policy is approaching its peak. The move in November is now perceived by us as the last, and we expect that an easing cycle could potentially commence in the second half of 2024. Central Bank authorities will be nervous about the potential of inciting a reversal of the lowering trend in inflation, and so they will tread cautiously and ‘jawbone’ the market continuously. Yet the evidence that discretionary expenditure has been squashed is clear.

Adam: So, does that mean long bonds rally strongly again?

Kieran: Perhaps sideways for a while, followed by incremental gains. As we have stated previously, the heady days of very low inflation as a function of globalisation are likely behind us (for now), given the elevated geopolitical risk developing in many corners of the globe. If the RBA sees inflation fall quickly toward the topside of their 2%-3% range in the next year, they will be satisfied. At 3% inflation, 4% Commonwealth Bonds represent a fair real return value.

Adam: Many of our investors always welcome more detailed commentary. Your Quarterly Report series has built a strong readership following. Can we expect the December Quarterly Report to be issued soon?
 
Kieran: Like many in the financial markets, we have taken a well-deserved holiday over the Christmas and New Year period, which is usually very illiquid anyway. The report will be distributed by the third week of January. There is a lot to review and a lot to consider.

Adam: Thanks for your time today. I look forward to the Quarterly, and I congratulate you again on a great debut first quarter.
 
Kieran and Megan: Much appreciated, Adam.

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