The Australian fixed interest market is not isolated from the global market. Currency movements, interest rate differentials, and credit quality are just a few of the factors that weave the Australian market into the global tapestry. With the rise of Kangaroo bonds, the question emerges: Does access to global resources give Australian fixed-income managers an edge?
For Australian Fixed Interest, the most cited benchmark for performance reporting purposes is the Bloomberg AusBond Composite Bond 0+ Yr. Index. This benchmark is a diverse mix of Government, Semi-Government, Supranational, and Corporate Bonds, issued by both Australian and Global companies.
In recent years, the credit component of this benchmark has evolved, largely due to the influx of Kangaroo bonds - bonds issued by global corporates in the Australian market. As of 31 May 2024, Kangaroo bonds represented 62% of the non-government segment, translating to approximately $188 billion in market value. This growth has been driven by European and APAC-based banks, who are tapping into our strong local demand and diversifying their sources of funding.
The appeal of Kangaroo Bonds
In a domestic context, demand for investment grade bonds paying a premium above cash rates is high, particularly at a time of low corporate defaults and supply imbalances. Kangaroo bonds have thrived in this landscape, as investors seek to capitalise on favourable pricing relative to global markets as is demonstrated in the charts below.
Access to Kangaroo bonds can be gained through either primary or secondary markets. Primary market issuance is a process where an issuer seeks expressions of interest from prospective investors for pricing and demand, a process similar to an IPO book build. Secondary market access, on the other hand, involves ‘over the counter’ (OTC) trading, whereby bonds are traded directly between two parties rather than through a centralised exchange such as the Australian Securities Exchange.
In Australia, demand for bonds offered through primary market issuance programs has been particularly strong, often translating into over-demand and spread tightening as bonds become available in secondary markets. Given this dynamic, many local fixed interest managers have sought to build exposure to these bonds.
The competitive edge of global resources
One challenge for those seeking access to Kangaroo bonds is the need to place bids in tight timeframes (generally 24-48 hours). Managers with a network of global credit analysts that provide real-time insights on global corporates have a significant advantage. These managers can leverage detailed, on-the-ground surveillance to inform their bids, contrasting with those who rely solely on relative-value assessments from a local perspective.
At Zenith, we acknowledge the merit of both global and local-only approaches, believing the successful execution of an investment strategy is closely aligned with the quality of the domestic investment team. Nevertheless, we believe that managers with access to offshore resources are better positioned to place bids with greater precision with respect to pricing, and this has the potential to translate into improved risk/return outcomes.
Evidence of outperformance
Our analysis supports this view, we’ve dissected our bond category and analysed a combination of performance and risk parameters to ascertain whether this theory holds.
Source: Fund Managers
Source: Excess Risk & Excess Return
The above chart shows the dispersion in excess risk-adjusted returns between managers with/and without a global capability over the 12 months ended 31 May 2024 - a period that saw a significant increase in the issuance of Kangaroo bonds. The results are clear, this chart illustrates that managers with a global capability, have consistently generated superior portfolio outcomes.
While other factors influence performance differentials, and market conditions may favour one approach over another at times, we believe that the growing number of global factors on domestic markets underscores the value of a robust, globally informed investment strategy. Access to a platform of resources enhances decision-making and ultimately strengthens portfolio outcomes.
