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22 Nov 2023
Like their unlisted managed fund counterparts, fixed income ETFs typically invest in assets such as government bonds, corporate bonds, asset-backed securities, as well as cash. Passive fixed income ETFs will track an index, while active ones typically follow an active strategy seeking to generate more attractive risk adjusted returns.
Globally, fixed income’s share of ETF net inflows rose from 23% in 2021 to 32% in 2022.1 Fixed income ETFs are expected to continue attracting an increasing share of ETF investment growth, as they seek to offer relatively liquid and transparent access to diversified bonds and cash investments.1
After operating in a protracted low yield environment, followed by a period of significant volatility, many investors naturally retained a lower exposure to fixed income assets. However, Brett Lewthwaite, Chief Investment Officer and Head of Fixed Income at Macquarie Asset Management, says fixed income is now in a better position to perform its traditional role in portfolios once more. It offers an attractive investment proposition, as a potential recession and equity risk hedge as well providing the potential for a relatively stable source of return opportunities for a broader investment portfolio.
“The sharp repricing in global fixed income markets has created an array of fixed income opportunities for active investors,” he says.
The fixed income investment universe is wide and diverse, offering compelling return opportunities for investors across the risk/return spectrum.
When considering fixed income markets, the current environment offers a higher yield to maturity than the average over the past decade. The yield-to-maturity is a common way to understand a bond’s return on investment and includes the interest rate, bond price, and years remaining until maturity – and factors in compound interest on the assumption that you reinvest your interest payments.
Average yield-to-maturity across fixed income markets
The following indices have been used to represent the different parts of the fixed income investment universe above: Global bonds – Bloomberg Global Aggregate Index; Global investment grade corporate - Bloomberg Global Aggregate Credit Total Return Index. *Yield-to-maturity is the return that would be earned over the next year if there were no changes to interest rates and assuming there are no changes to the underlying investments. The number which is quoted is before fees. Yield-to-maturity is not the actual return that an investor can expect to receive investing in these indices. Average yield-to-maturity has been calculated as the average of the monthly yield-to-worst over the last 10 years to September 2023. Current as of 19th October 2023. Source: Bloomberg
“Historically, bonds have generally performed well in recessions,” Lewthwaite explains, as shown in the chart below. “We have experienced the most aggressive monetary policy tightening cycle since 1979-80. Patterns of past cycles suggest that when central banks tighten at that pace, it has usually resulted in a recession.”
Past performance of bonds leading into and during a recession
Source: Bloomberg, 2023
The sharp repricing in global fixed income has created an array of fixed income opportunities for active investors.”
Brett Lewthwaite, Chief Investment Officer and Global Head of Fixed Income, Macquarie Asset Management
Actively managed fixed income funds can help improve potential risk and return outcomes in comparison to passive peers.
Importantly, passive fixed income indices are weighted towards issuers with larger amounts of debt. As fixed income has an asymmetric return profile, where the downside is much greater than the upside, this passive approach can skew exposure towards downside risks.
The flexibility of an active approach allows for this downside risk to be managed more effectively, while continuing to seek active investment opportunities. The aim is to deliver a smoother investment journey.
And the real benefit of active management is that you aren’t just tracking the market. If the market shifts, the portfolio manager can respond, because they are always looking to achieve the best market outcome and protect against downturns.
Many investors look to fixed income investments to help them preserve capital while delivering regular income. The Macquarie Income Opportunities Fund, now available as an active ETF, recently marked 20 years of delivering on its objective of regular income – through the GFC, the European Sovereign Crisis and the COVID pandemic.
With the recent increase in interest rates, fixed income investments are cushioned by an increased level of income (or coupons). This provides a key source of total return for fixed income investments and offers a greater level of protection against capital loss than during a period of low interest rates.
“The Macquarie Income Opportunities Fund invests in a core portfolio of investment grade securities and cash, seeking to deliver regular income,” explains Lewthwaite.
Depending on the prevailing market cycle, the Fund will also opportunistically allocate to higher yield or emerging markets debt.
“But we are very prudent on these allocations as they can incur a higher level of risk,” he adds. “We have a real focus on liquidity, because as we saw during the GFC and COVID, the risk with liquidity is that when you need it most it’s just not there.”
The Macquarie Dynamic Bond Active ETF (Managed Fund) highlights the potential of a truly active fixed income investment, always looking for the best opportunities on offer.
“Our team saw a gap in the market for a strategically designed, dynamically managed, truly global bond fund,” explains Lewthwaite. “Fixed income benchmarks, especially for global bonds, are inefficient – they reward the biggest debtors. And that can lead to risk.”
Instead, the Macquarie Dynamic Bond Active ETF (Managed Fund) seeks to only invest in the most attractive bonds, across the global spectrum. It’s strategic rather than beholden to a benchmark. “Our deep and experienced global team seek to identify the best individual securities available to build a portfolio based on our outlook for markets going forward” says Lewthwaite.
In this way, the active ETF can manage conflicting objectives. “It can seek to protect the downside with interest rate duration, but also be more opportunistic with tactical exposures in credit markets and emerging markets. It’s both an offence and defence strategy,” says Lewthwaite.
Over 130 investment professionals around the world are dedicated to working on Macquarie’s fixed income strategies. Portfolio managers discuss market changes and portfolio positioning on a daily basis, and the entire global portfolio management team meets weekly to develop a holistic view of the forces at play in global financial markets.
“A cohesive team, that focuses on effective communication whilst collectively formulating views on evolving markets and portfolio positioning is essential for any successful investment team” says Lewthwaite.
This disciplined process is enhanced by the experience within the team, with over 40 years’ experience delivering fixed income solutions to Australian investors. Macquarie is now bringing this investment expertise to a wider market, with the release of two actively managed fixed income ETFs:
“Fixed income is the defensive anchor of an investment portfolio, and it also offers an array of return opportunities,” says Lewthwaite. “These fixed income active ETFs make it even easier for advisers to construct or rebalance portfolios and access Macquarie’s fixed income expertise.”
All investments carry risk. Different investments carry different levels of risk, depending on the investment strategy and the underlying investments. Generally, the higher the potential return of an investment, the greater the risk (including the potential for loss and unit price variability over the short or long term). The risks of investing in the Funds include:
Investment risk: The Fund seeks to generate higher income returns than traditional cash investments. The risk of an investment in the Fund is higher than an investment in a typical bank account or term deposit. Amounts distributed to unitholders may fluctuate, as may the Fund’s unit price, by material amounts over short periods.
Manager risk: There is no guarantee that the Fund will achieve its performance objectives, produce returns that are positive, or compare favourably against its peers, or that the strategies or models used by the Investment Manager will produce favourable outcomes.
Income securities risk: The Fund may have exposure to a range of income securities. The value of these securities may fall, for example due to market volatility, interest rate movements, perceptions of credit quality, supply and demand pressures, a change to the reference rate used to set the value of interest payments, market sentiment, or issuer default.
More information on the risks of investing in the Funds is contained in the relevant Product Disclosure Statement, which should be considered before deciding to invest in the Funds.
The Macquarie Income Opportunities Active ETF (Managed Fund) is a separate class of units in the Macquarie Income Opportunities Fund (ARSN 102 261 834) and the Macquarie Dynamic Bond Active ETF (Managed Fund) is a separate class of units in the Macquarie Dynamic Bond Fund (ARSN 101 815 141). A separate class of units is not a separate managed investment scheme.
Important information
The Target Market Determination (TMD), available at macquarie.com/mam/tmd, includes a description of the class of consumers for whom the Fund is likely to be consistent with their objectives, financial situation and needs.
Past performance information is not a reliable indicator of future performance.
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