5 fixed income funds that outperformed over the past 12 months

Rising rates and fears of an economic recession didn't stop the rally in risk assets but it did put the brakes on a 40-year bull market for government bonds. 

FY2022/2023 was characterised by an early surge in bond yields as market expectations for interest rates went up and down like a yo-yo. 

The surge lasted until October when the Australian 10-year yield topped out at 4.2%. After that, government yields more or less range-traded with the Australian bond index closing out the year with just a 1.2% gain.

In the corporate bonds space, things were slightly brighter. The Bloomberg/Barclays Global Corporate Bond Index posted a total return of about 2% and its riskier high-yield cousin posted a total return of more than 10%.

Among the stable of Livewire's fixed income funds, bottom-up money managers notched up an average return of 3.5%. But there was definitely one clear runaway winner. 

In this wire, I'll introduce you to the winning house plus share with you insights from the list. 

How we compiled the list

The following list was compiled using the information in Livewire's Find Funds feature.

• In the “Fund type” box, select “Managed Funds”
• In “Asset Class”, select “Fixed Income - Australia and Fixed Income - Global”
• We then sorted the results based on 1-year returns.

Note: FY22 was a record year for bond price falls and FY23 will feature a lot of catch-up in this regard. Fund performance is also typically viewed over longer timeframes than one year (i.e. three-year and five-year rolling periods).

The table below simply captures the best-performing fixed-income funds for the past 12 months. All data is supplied by Morningstar. If you would like to conduct your own research into top-performing funds, you can do so by clicking here.

1. Fortlake Real-Income Fund
2. Fortlake Real-Higher Income Fund

The number one and two spots in our data scan go to Fortlake Asset Management. Fortlake's approach is to bring institutional-grade research and money management to retail and wholesale investors. 

While a lot of fixed-income fund managers tend to play only in limited spaces or individual silos, Fortlake's remit is literally the world. It uses a combination of quantitative screens and a proprietary framework to identify assets that could provide strong returns and security to its investors.

600 individual positions and 26 countries later, the fund has made an absolute return of more than 20% to investors. Going forward, Fortlake CIO Dr Christian Baylis recently told our own Glenn Freeman that he is looking to lean into areas of the market with higher volatility.

"So that for us means that we're going to be more heavily skewed towards government bond markets, more heavily skewed towards lower default risk type markets because that's where the volatility is. And it also means on the other hand, is we're not going to be as aggressively allocated to credit in these sorts of areas, because the volatility's not there."

Managed Fund

Fortlake Real-Higher Income Fund

Australian Fixed Income

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Managed Fund

Fortlake Real-Income Fund

Global Fixed Income

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3. Manning Monthly Income Fund

Debuting in third place, the Manning Monthly Income Fund invests in a very niche area of the fixed-income and credit markets. 50% of the fund's 13,000 constituents are invested in mortgage-backed assets (residential and commercial). 

But in order to avoid the mistakes of 2008, the Manning Asset Management team prioritise finding assets that are backed by proven counterparties. 

CEO Josh Manning told me all about their process and why they feel they don't need to have a view on property prices in order to outperform during this year's Income Series. 

Managed Fund

Manning Monthly Income Fund

Australian Fixed Income

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4. Realm High Income Fund - Wholesale
5. Realm Strategic Income Fund

Taking fourth and fifth place are the flagship funds of Realm Investment House. The High Income Fund, which has been soft closed for three years, is allocated primarily towards corporate bonds and tier-one bank hybrids. The performance of the latter following the global banking crisis was a big contributor to its second-half outperformance. 

The fund also benefitted from an overweight allocation towards global AT1 bonds. They also forecast more upside to come in this part of the market.

"The outlook for AT1 remains favourable and we expect ongoing spread contraction, yet value is also emerging in mezzanine CLO [commercial loan obligations]," Realm wrote in its latest fund update.

"With a yield to maturity of nearly 8% and a credit duration of 3.4, the portfolio is well positioned to benefit from an ongoing normalisation of credit spreads in non-AUD bank capital and elsewhere," they added.

In contrast, more than 90% of the Strategic Income Fund is invested in RMBS (residential mortgage-backed securities) facilities. On the housing market, Realm say that they expect arrears to remain low and the outlook for prices to "remain constructive". 

Managed Fund

Realm High Income - Wholesale Units (Soft Closed)

Australian Fixed Income

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Managed Fund

Realm Strategic Income Fund - Enduring Units

Australian Fixed Income

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