Top Performing Funds: The bond funds that crushed it in FY24

Fixed income is the traditional hedge against uncertainty. But stubborn inflation has led to a delay in the start of the rate-cutting cycle - especially in Australia where the conversation has turned from a 2024 rate cut to a 2024 rate hike. 

All this meant that the benchmark Bloomberg Global Aggregate Bond Hedged Australian Dollar Index returned just 2.8% last year. Though bond bulls will tell you that when rate cuts eventually do come, the drop in yields (and therefore, increase in prices) will be quick and sizeable. If central banks can pull off these rate cuts without causing a hard landing, then corporate credit will also likely be a strong performer moving forward.

In a market that is as complex as fixed income, it helps to have a manager who can read the macro environment and navigate the myriad of opportunities that are available in this asset class through shrewd trading. The perfect case in point comes up in the FY23/24 fund performance data, provided to us by Morningstar. 

In this wire, we'll show you the Top 10 performers as well as detail some observations and commonalities among them.

How we compile these lists

The performance numbers for this piece are sourced from Morningstar.

The funds are all listed on Livewire’s Find Funds menu (top right-hand side of your webpage). This is not an exhaustive list of all fixed-income funds available in the Australian market, nor does the list include ETFs, LICs and LITs. It's also worth noting that some fixed income oriented funds are classified by Morningstar as "alternative" assets and thus are not featured in this wire.

The filters we used are:

• In the “Fund type” box, select “MANAGED FUND”
• In the “Asset class” box, select “FIXED INCOME” (both Australian and global returns were used here)
• We then manually filtered results based on 1-year returns.

It’s worth noting that the results can change again based on 3 and 5-year returns and it’s worth looking at longer-term performance across cycles when researching funds or making investment decisions. 

Note: Past performance is not a reliable indicator of future return. The tables above simply capture the best-performing global funds, in their respective categories, 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) The specialists know what they're doing

Three of the top five place-getters work in the credit space exclusively, including the world's largest fixed-income house in PIMCO. And although KKR and Ares have other ventures, credit is a major part of both of their businesses. KKR's credit assets under management alone exceed US$260 billion while Ares Investment Management's credit arm has AUM of well over US$300 billion. In other words, the specialists really earned their bacon this year and demonstrated how active management in this space does make a difference.

2) Bank bills were an excellent investment idea...

We've heard a lot about the appeal of bank bills in the last year. In Australia, they can net you between 7-9% yield for Tier 2 paper. Those yields are so attractive that Yarra Capital Management's Roy Keenan swears by them, as he told our own Chris Conway in this interview from Livewire's Income Series.

But it's not just Australians reaping the rewards. The top performer in this year's scan, the PIMCO Capital Securities Fund, also invests heavily in global bank bonds. Specifically, the PIMCO Capital Securities Fund invests primarily in AT1s (Additional Tier 1 securities). In their view, the global banking sector is undergoing a "generational paradigm shift" (in turn, spurred on by the collapse of SVB and the UBS-Credit Suisse merger) and they argue that valuations in this niche but part of the market remain attractive.   

3) ...although moving up the risk spectrum was as well

The other big theme of FY23/24 was the money to be made in high yield. The fears around a sharp decline in corporate earnings and a default mega-wave, spurred on by a surge in refinancing costs, never really came to pass. That sure would have vindicated the views of Ares, KKR, T. Rowe Price, and Metrics - all of which play in that riskier and higher-yielding part of the market. 

For instance, 59% of the KKR Global Credit Opportunities Fund is in B-rated debt and just 1.6% is in Investment Grade (top-tier quality debt). Meanwhile, T. Rowe Price had this to say to its clients:

"High yield issuers’ fundamentals remain strong, despite some measures normalising from historical highs. Although companies will be issuing new debt at higher rates this year, many will do so in a laddered manner with only a portion of their debt maturing over the next two years, while likely benefiting from falling interest rates in 2024."

4) You don't always have to leave Australia

Finally, half of the Top 10 funds on this list are Australian-domiciled and have most of their investments in this market. However, it should be noted that of those five, three of them have high exposures to the Residential Mortgage-Backed Securities (RMBS) market. Investors find great opportunities here given how leveraged our economy is to housing and house prices. The other two work in sub-investment grade debt (Metrics) or in a combination of bank bonds and ASX-listed company debt (the Yarra Enhanced Income Fund).

We've spoken to many of the people who run these funds on the Livewire platform within the last year alone. 

• Teiki Benveniste of Ares Australia Management joined me recently for three editions of The Pitch. In this video, Teiki shares three opportunities he is finding in his area of the market.
• I also recently interviewed Jeremiah Lane, the man behind KKR's Global Credit Opportunities Fund. In the interview that pairs with this link, he shares with us his views on the risk of a major default cycle and how higher-for-longer rates are influencing his team's asset allocation.
• In February, T. Rowe Price's Mike Della Vedova joined me for an edition of Views from The Top. Listen in, not just for his views on high yield, but for a story that will make even a novice investor become attracted to the real-world applications of credit. Della Vedova also joined us for the Income Series recently - that interview can be read here.
• We've also spoken many times with Metrics Credit Partners' Andrew Lockhart. Most recently, he spoke with my colleague Sara Allen as part of the Income Series. You can catch that interview here.
  

You can catch more of the series here:

Starting with this wire from Sara on the top-performing global equity funds of FY24. 

Funds

Top performing funds: How 2 global equities managers dominated in FY24

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