Morningstar - Q3 2020 - 24

Dispatches

How Managers Bet on Duration Managers have tended to stay shorter than
the benchmark.
Long

Short

% of Strategies Long or Short vs. Bloomberg AusBond Composite Index
100

75

50

as the global economy wobbled following the
collapse in oil prices. Since then, an increasing
number of Australian bond managers have
neutralized or even switched from a short to long
bias, though the timing has varied. UBS Australian
Bond, for example, was among the earliest
to do so, having moved far closer to the index
since early 2015, whereas Schroder Fixed Income
maintained its significant short stance until
late 2018, finally shifting gears into a meaningful
long-rates bet in 2019 after acknowledging the
impact of U.S.-China trade tensions and a change
in the posture of the U.S. Federal Reserve.

25
0
01/2012

01/2014

01/2016

01/2018

03/2020

Source: Morningstar Direct. Data as of 04/30/2020.

Average Size of Duration Bets Active managers bet bigger going short than long.
Average Long

Average Short

Average Duration vs. Bloomberg AusBond Composite Index
1.0

0.4

0.5

0.0 0
-0.5
-1.0
-1.5
01/2012

01/2014

01/2016

01/2018

03/2020

Source: Morningstar Direct. Data as of 04/30/2020.

We looked at effective duration statistics since the
start of 2012 for strategies in three separate
camps: Australian bond funds that benchmark
themselves to the Bloomberg Australian
Composite Bond Index, broader-ranging global
bond funds, and what we've deemed to be flexible
bond funds that pay less heed to traditional
bond indexes. An important caveat is that not all
managers provide data monthly, which can
exaggerate the size of month-to-month changes in
the charts. The broader trends are nonetheless
illuminating.

24

Morningstar Q3 2020

After being heavily short-biased in 2013-14,
Australian bond strategies had steadily migrated
to a more neutral and even modestly long-duration
exposure by early 2020. The first exhibit shows
the percentage of managers that were relatively
long or short the index over time.
There was an overwhelming short bias from late
2013 through much of 2014 that has since
dissipated. In fact, most active managers were
leaning long by the end of 2019. The consensus
view in 2014 turned out to be misguided

The second exhibit shows the average size of
these active positions. On balance, the data
suggests that Australian bond managers have
tended to take higher-conviction views when
leaning short rather than long, though that
difference has become less overt since 2019. This
aversion to interest-rate risk is understandable,
given that low yields and flat yield curves
have offered modest compensation for taking term
risk. Furthermore, few managers expected the
protracted period of subdued inflation that has
been in place for much of the past decade.
While an increasing number of Australian bond
strategies have lengthened their interest-rate
risk since 2019, overall, most managers have
historically been reluctant to do so, in both relative
and absolute terms. We also found that global
bond managers have tended to maintain a
collective short-duration exposure even in recent
years. This is not so surprising, given that
sovereign global yields and curves have often
been lower and flatter than in Australia.
For the third group, flexible fixed-interest
strategies, we looked at outright duration, as
benchmarks have little relevance to most
of these vehicles. It is very rare to see duration
topping three years-which is still far below
traditional bond indexes-and it's often
been less than one year. This echoes the prevailing
caution about extending duration, witnessed
in the traditional fund universe.
Our starting point was to find out whether
big-duration bets have paid off. Unfortunately,
there isn't much evidence to confirm this.
Morningstar - Q3 2020

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