Purchase of Betashares Western Asset Australian Bond Fund ETF (ASX: BNDS)

The Betashares Western Asset Australian Bond Fund ETF (ASX: BNDS) has been added to portfolios that have a fixed interest component. The new position has been funded by the sale of the iShares Treasury ETF (ASX: IGB) and a reduction to the Janus Henderson Tactical Income Fund position. The holding will sit within the Australian Fixed Interest asset class.

What has changed in the market:

In recent months, concerns around the banking sector that drove market volatility back in March have eased while inflation continues to be an issue. Bond investors have again pivoted dramatically in terms of their expectations around the future path of interest rates. Ultimately, bond yields have once again risen to levels that better reflect the inflationary environment and likely monetary policy path of the RBA.
With more reward (attractive levels of income and reduced positive correlation to equity markets) and relatively less risk (market is already pricing in higher rates for longer), we believe it again makes sense to lengthen the duration within the fixed interest part of the portfolio.
With the cumulative impact of tighter financial conditions posing risks to the economic outlook, we are keenly focused on risk-adjusted returns within fixed interest, but believe the spread on high-grade, liquid credit offers an attractive yield pick-up relative to government bonds given current credit spreads.

What we like about Western Asset:
We are attracted to the strategy for the following reasons:

·         An experienced portfolio management team based in Melbourne;
·         Western Asset is a specialised fixed interest firm with global research capabilities;
·         The Team follow a simple investment process; and
·         Provides longer term structural duration closely managed to a benchmark

Currently, the fund carries 5.5 years of duration, has a Yield to Maturity of 4.87%, and is broadly invested across government and investment-grade corporate bonds.

Conclusion:
The change increases portfolio sensitivity to changes in bond yields and slightly more income as the exposure to high-grade corporate credit provides higher yields relative to only holding government bonds. We continue to believe that fixed interest should be treated as a defensive exposure within portfolios, and that “active” fund managers are better placed to navigate the current volatile market environment. Following these changes, the Australian fixed interest component of portfolios is now neutral duration relative to its benchmark.  
As always, thank you for your ongoing support, it is very much appreciated.

If you have any questions or would like more information, please contact your adviser.

Warnings and disclosures
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