Annual Report 2018
Income & Fixed Interest

Further monetary normalisation by global central banks and geopolitical disruptions were two key drivers of fixed interest markets over the year. The sell-off in emerging markets contributed to a rise in volatility.

Further monetary normalisation by global central banks and geopolitical disruptions were two key drivers of fixed interest markets over the year. This contributed to a sell-off in emerging markets and a rise in volatility over the period. In contrast, the US dollar strengthened alongside outperformance of the US economy versus its developed market peers.

The Income & Fixed Interest boutique offers a diverse range of capabilities across the asset class. This covers the spectrum from cash at one end to absolute return strategies at the other. Each team member brings their own set of differentiated expertise and in-depth knowledge to enhance the wide set of offerings.

In the alpha strategies each Portfolio Manager is dedicated to a particular area, including Australia, Europe and the US, and Emerging Markets (EM). Their views are supported by the broader team of analysts that contribute to both the quantitative models and qualitative input. During the year the team added a new analyst, Lin Xu, who assists in quantitative analysis focused on Australian bonds and cash. Meanwhile, Vimal Gor, as Head of Income & Fixed Interest, is vital in bringing the team’s views together and managing the overall positioning of the portfolios.

The team’s capabilities in EM proved particularly valuable during the year with a large divergence in performance within the category. The analysis in this area was supported by the build-out of a dedicated emerging market quantitative pack that is discussed in standalone strategy meetings. The expertise in the area also assisted in the creation of a new income strategy launched in December 2017, the Dynamic Income Fund, which allows an allocation to EM debt and where risk management proved critical. The team’s broader global qualitative and quantitative process remains a significant strength of the boutique. Models were refined further through the year with new additions also made.

The boutique’s defensive approach to managing portfolios is a key differentiator relative to peers in the market. The implementation of this defensive bias was refined through the year as rising interest rates means duration may well be less reliable as a diversifier during times of equity market stress. Outright shorts in credit markets were also costly at the end of 2017. As such, the defensive bias was achieved through a relative value approach to credit, outright long volatility strategies and directional FX positioning.

The result of this approach was pleasing with the flagship Pendal Fixed Interest Fund delivering the strongest return in its Mercer peer group for FY2018. This came at a time when many other managers were suffering negative returns from riskier credit investments and struggling with generating returns during a rising interest rate environment. In contrast, our funds achieved strong returns including the flagship, Monthly Income Plus strategy.

The Dynamic Income Fund also realised a strong outperformance as high returns from the domestic credit allocation more than offset weakness from emerging markets. This success resonated with clients and contributed to considerable growth in the size of this fund over the period. Going forward, we expect further sizeable inflows as demand for differentiated income products grows and the strategy builds on its track record.

Another area that has seen growing demand is sustainable investing, which takes into account Environmental, Social and Governance (ESG) and Responsible Investing (RI) criteria. This was reflected in strong inflows into our sustainable product suite. We have a strong and growing commitment to these strategies, which includes a new regular sustainable strategy meeting that includes the Head of Responsible of Investing, Edwina Matthew.

A key initiative within the boutique over the last three years has been building the infrastructure and processes to manage a dedicated volatility fund. With volatility now picking up across asset classes the timing to launch a product is now optimal. The Active Long Volatility Strategy, which is in the final stages of launching as a standalone fund, is a very promising strategy for both clients and the boutique. A simplified version of the process has been followed in the alpha strategies with positive outcomes that closely follow the backtest results. Strong client interest is expected as demand for such highly differentiated strategies continues to grow.

Overall it was another strong year for the boutique with the flagship strategies delivering on client expectations. This was particularly evident in their outperformance during risk-off periods and heightened volatility. As monetary policy normalisation continues, we believe higher levels of volatility are likely to persist. In such an environment, the team’s proven investment process should continue to perform in line with expectations. Additionally, with the expanded strategy offering we expect continued strong FUM growth for the boutique.

Pendal Sustainable Australian Fixed Interest Fund View the latest fact sheet
Pendal Fixed Interest Fund View the latest fact sheet
Monthly Income Plus Fund View the latest fact sheet
Pendal Pure Alpha Fixed Income Fund View the latest fact sheet