Multi-asset income has grown to become the largest of the unit trust fixed income categories. The category is also the most diverse, allowing a very broad range of instruments with varying interest rate risks. One of the catalysts to this growth was the development of the local credit market which took off in the early 2000s as government issuance declined and companies began to see the benefits of diversifying their sources of capital by adding debt to their funding mix. This saw the domestic corporate bond market grow rapidly, following the global trend and providing the ideal asset for income type funds as most of the issuance was high quality (investment grade) and paid a floating rate coupon, which comes with little interest rate risk.
The growth in the credit market was part of a significant change in the local bond market which included inflation-linked bonds and longer dated government bonds. However, the different type of instruments remained siloed in their “specialised” portfolios like money market, income (mainly credit), inflation-linked and nominal bonds. What it meant was that if you wanted to be exposed to the full set of opportunities in the fixed income space, you had to invest in several funds – an offering that we provided to our clients.
Increasingly, clients were asking us to manage a “blended” portfolio which included more than one of these offerings with different benchmarks (eg 70% ALBI, 20% CILI and 10% Stefi). Over time, this developed into our “Unconstrained Fixed Interest” offering, first in the institutional (2012) space and later as the “Visio BCI Unconstrained Fixed Interest” unit trust (2016) where we decided on the split between the assets with an objective of performing in line with the All-bond Index, but with less than half the volatility, and materially lower downside capture.
When launched as a unit trust, the unconstrained fund was unique in the category as it was not a credit fund (although it does invest in corporate bonds when they are deemed to offer value) and has the flexibility which does not limit the holding to type or term. Over the last two years or so, with a (relatively) shrinking credit market, more traditional income funds have migrated to rely on other sources of performance which, in many cases, come with higher interest rate risk.
The unconstrained fund philosophy, strategy and objectives have not changed since its inception in 2012, suggesting that the performance signature is likely to remain similar going forward (better returns than the category and similar returns to the ALBI with much less volatility). Many other funds in the category, however, have changed from traditional income funds to an unconstrained lookalike suggesting a different (and somewhat experimental) performance signature to their past.