The best-performing fixed income funds from 2022 have this one trait in common

2022 was the year of decimation for fixed income investors. It was the worst year ever for US Treasury prices, with the yield on a US 10-year benchmark bond up 225 basis points. Across the curve, bonds were sold off as inflation smashed the value of those instruments. 

And because bond prices move in the opposite direction of yields, central bank rate hikes to quell inflation also smashed the value of these bonds and as a consequence, fixed income funds. While assets of all instruments were affected, the biggest moves were at the short end of the curve where two and three-year yields across the globe jack-knifed on multiple occasions. You'll see some of that effect show up in our list.

But in proof of just how difficult it was to make money through bonds last year, only 10 of the 77 global and Australian fixed income funds covered by Livewire Markets recorded a positive return. Even if none of them were double-digit returns, that's still an achievement given the performance of the assets in them.

In this wire, I'll take you through the best performers from a torrid calendar year. And as you're about to find out, all of these funds have one thing in common - they took advantage of the one thing everyone else was scared of (rising interest rates). 

How we compiled the list

The following list was compiled using the information provided here.

• 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.

Important: We have only covered the funds under Livewire's umbrella. Thus, it doesn't represent the entirety of the market. Fund performances are also generally viewed over longer time frames. This list only includes managed funds and does not include fixed income trusts or ETFs. Past performance is not a reliable indicator of future return.

All data is supplied by Morningstar.

Big Themes

2023 has been marked as the year of the return of the bond market - partially because central bank rate hikes are starting to take effect and partially because 2022 was so bad that bonds surely cannot be priced even lower.

PIMCO's Adam Bowe made note of this when he shared his predictions with my colleague Chris Conway recently.

"Rates will stabilise at high levels, bonds should do reasonably well as rates stabilise, while risky assets will likely start to struggle. Inflation will start to moderate back towards central bank targets, but will likely take a couple of years to get there," Bowe said.

Andrew Canobi of Franklin Templeton has gone one better. In a recent wire, Canobi said he was focusing his energy on the short-end of the market (i.e. bonds with less than five years until maturity) given that's where the rally will likely be when central banks pause.

"...yields in the short to intermediate part of the curve (2-5 years) will rally the most when central banks pivot away from their current approach..."

But this refrain is almost always government-bond-centric, a fact not lost on the top-performing funds given most of the top five have some involvement in the corporate or private debt market. Some high yield and corporate investment-grade debt opportunities (stateside) are attracting big yields, and we could see some flow-through of that to Australian corporates provided earnings remain resilient.

#1: Fortlake Real-Higher Income Fund

Managed Fund

Fortlake Real-Higher Income Fund

Australian Fixed Income

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Run by Christian Baylis and his team, the Fortlake Real-Higher Income Fund has two main priorities. The first is obvious (quarterly distributions) and the second has been the big theme among all the top-performing bond funds mentioned in this wire (inflation protection). 

The fund provides access to a collection of corporate securities which are designed to enhance income and increase liquidity without exposing investors to too much risk.

Its one-year return of 7.54% places it second in the Livewire stable but only just slightly above its mandate of 4% + the current Reserve Bank cash rate.

#2: Metrics Direct Income Fund

Managed Fund

Metrics Direct Income Fund

Australian Fixed Income

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Clocking in at second place with a return of 5.69% for calendar 2022, the Metrics Direct Income Fund gives investors exposure to Australian corporate loans. The fund is heavily diversified by borrower, industry and credit quality.

But the secret to this fund - and a lot of the Metrics Credit Partners investments - is the floating rate nature of their returns. If rates go up, so too do the returns, as Lockhart explains.

"Those RBA cash rates and the market rate through BBSW or BBSY are immediately reflected in the higher cost of funding. This is one of the benefits of investing in floating rate, short-dated exposures - as interest rates rise, the higher base rate is immediately charged to the borrower, delivering a higher total return for our investors."

#3: Realm Strategic Income Fund - Enduring Units

Managed Fund

Realm Strategic Income Fund - Enduring Units

Australian Fixed Income

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The Realm Strategic Income Fund, run by Andrew Papageorgiou and his team, was first in the FY22 rankings but comes in third for the calendar year, with a 12-month return of 5.44%. 

61% of the fund is made up of private asset-backed securities (ABS) and residential mortgage-backed securities (RMBS).

Of this list, it is also interesting to note that the fund's calendar 2022 performance was the furthest from its own mandate. Realm's target return is 4.75% + the Reserve Bank cash rate. For 2023, that means the fund will be looking at targeting a near-8% effort at least. 

#4: Challenger IM Credit Income Fund

Managed Fund

Challenger IM Credit Income Fund

Australian Fixed Income

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Managed by Pete Robinson and the CIP Asset Management team, Challenger's credit income fund just scraped out a positive return. But any positive return is a win on this year's list!

The fund has a running yield of 3.1% and, like Realm's Strategic Income Fund, has an average asset rating of BBB-, which is still investment grade. 

In a recent edition of Expert Insights, Robinson told our own James Marlay that he's seeing opportunity in the residential securities market. He says that borrowers have taken on big loans while on low loan-to-value ratios. This, combined with structural trends in the housing market (low rental vacancy rates, for example) make for a ripe investing environment.

Fixed Income

Where CIP Asset Management sees credit opportunities in the rubble

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#5: First Sentier Wholesale Strategic Cash Fund

Managed Fund

First Sentier Wholesale Strategic Cash Fund

Australian Fixed Income

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The fifth fund on our list does exactly what you think it does - provide a regular income stream from money market securities. Some of these include convertible term deposits and mortgage-backed securities. And, much to its benefit last year, the fund primarily invests in assets that have short maturities (i.e. they expire soon). 

As is with all assets, interest rates affect just about every part of this fund. As the cash rate changes for each central bank around the world, so do the value of bank bill yields. 

Conclusion

While this is a list of top-performing fixed income funds, we want to make some very important points. Firstly, fixed income is a huge beast in and of itself. This list did not separate the funds into the sub-sections of the asset class. For instance, the Metrics fund on this list looks at corporate debt but the First Sentier fund deals in money market securities. 

In addition, different funds use different maturities for some of the assets in their respective portfolios. For instance, last year was a good year to be nimble and own lots of non-government-denominated securities. 

These two facts alone demonstrate just how challenging it can be to find returns in the fixed income universe.

Finally, all these top-rated funds have an Australia-centric focus. If we included global bond funds, the dynamics of the list would have changed even more dramatically. 

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I'll be in charge of asking the questions to Australia's best strategists, economists, and fixed income fund managers. If you have questions of your own, flick us an email: content@livewiremarkets.com