Addendum: SQM Research have re-submitted this Newsletter
Yesterday SQM Research released an official note regarding the release of the Alternative and Fixed Income sector reviews. The returns data included in this analysis included some pre-inception data for some funds, which were inadvertently undisclosed. We have presented updated returns with data going back only to inception.
For those wishing to read the full Alternative and Fixed Income sector reviews, please click HERE.
SQM Commentary - Fixed Income and Alternatives Sector
In 2018, SQM Research’s ratings universe for the Fixed Income and Alternatives sectors grew substantially. SQM Research rated 14 fixed income funds in 2018, up from 8 in 2017. In 2018, 17 alternatives style funds were rated, up from 10 in 2017. Since 2015, SQM Research has completed 38 ratings for alternative funds, with an average rating of 3.94 and 33 ratings for fixed income funds, averaging 4.01 stars.
In the latest review of the fixed income sector, it was evident that long duration funds struggled. Despite credit spreads rising, funds positioned for lower duration and funds focussed on credit performed relatively better than other benchmark aware funds.
DDH Preferred Income recorded 3.88% total return (duration of 0.10), providing 1.43% alpha against the Bloomberg Ausbond Bank Index. This is followed by Supervised Global Income and Spectrum Strategic Income, all debt and credit focussed investment strategies.
Average 1-yr volatility of the rated funds was 2.06%, pushed slightly higher by Franklin Templeton Multisector Fund, which recorded 8.42%. Franklin Templeton MS Fund’s performance was significantly affected by its exposure to Latin America.
In October and November, both equity and bond indices declined. US credit spreads were pushed wider as LIBOR continues its upward trend. Evidently, from the funds positioned in top-left portion of the Vol Vs Return matrix, it is clear that positioning in short-dated, investment grade credit and lower duration has been proven to be an alpha generating strategy.
The alternatives sector recorded a broader range of 1-year returns. P/E Global Alpha produced alpha from macro investments that were positioned for US economic strength and widening 1M short term interest rate differentials, in favour of US yields. Harvest Lane produced returns as a return of profitably investing in its corporate activity, events-driven centric strategy.
Alternatives sector funds aim to provide some diversification away from traditional equities, by way of low correlation. SQM Rated funds in the alternatives sector averaged about 0.15 correlation on a 1-year basis. This was pushed slightly higher by Allan Gray Balanced Fund and Cor Capital, which recorded 0.70 and 0.60 respectively.
Despite a volatile 2018 up to November, SQM Rated alternatives sector funds averaged 10.62% volatility on a 1-yr basis, lower than volatility readings across most developed and emerging market equity indices. In the three most volatile months of 2018 so far- March, October and November, SQM rated alternatives sector funds averaged returns of 0.14%, -1.68% and -0.29%.
Although performance on average has been negative on a 1-year basis, SQM rated alternatives funds have provided for some low correlation compared to ASX300 and some defensive positioning against equity market distress.
SQM Research is of the view that the current environment of rising rates and deterioration in macroeconomic trends will persist. Look forward to our January 2019 edition for detailed analysis on various macroeconomic and financial market metrics and its implications.
SQM Research now has data and analytics on over 10,000 funds in Australia which are available in an very easy to use and affordable month by month subscription package. For more information or if you would like to subscribe, click HERE.
SQM Research's Top 5 SQM Rated Funds for November 2018
SQM Research's Top 50 ETFs for November 2018
(Please note: In order to view individual ratings reports you must be subscribed to SQM Research Ratings research. To subscribe, click HERE)
For further information:
Rob da Silva - Head of Research
Tel: (02) 9220 4606
Louis Christopher - Managing Director
Tel: (02) 9220 4666
About SQM Research
SQM Research is an independent property advisory, ratings and forecasting research house which specialises in providing accurate property related advice, research and data to financial institutions, property developers and real estate investors. For more information please visit www.sqmresearch.com.au
In general, the assessment approach adopted by SQM Research incorporates a combination of qualitative and quantitative research techniques to assess property investment products. Information generated is passed through the SQM Research assessment model at the completion of the assessment process. The assessment model generates a product score, which correlates to a specific star rating (out of a maximum of five stars). Each star rating covers a scoring range, allowing products to be ranked within quarter star increments.
Following are descriptions for each of the star ratings, which have been developed as a guide for dealer group research teams and investment committees:
4.5 stars and above – Outstanding. Highly suitable for inclusion on APLs.
4 stars to 4.25 stars – Superior. Suitable for inclusion on most APLs.
3.75 stars – Good. Consider for APL inclusion.
3.5 stars – Average. Consider for APL inclusion, subject to advice restrictions.
3.25 stars – Caution required. Not suitable for most APLs.
3 stars – Strong caution required. Not suitable for most APLs.
Below 3 stars – Avoid or redeem. Not suitable for APL inclusion.
Hold – The rating is currently suspended until SQM Research receives further information. A rating is typically put on hold for a period of 2 days to 4 weeks.
Withdrawn – The rating is no longer applicable. Significant issues have arisen, and investors should avoid or redeem units in the fund.
The rating contained in this document is issued by SQM Research Pty Ltd ABN 93 122 592 036. SQM Research is an investment research firm that undertakes research on investment products exclusively for its wholesale clients, utilising a proprietary review and star rating system. The SQM Research star rating system is of a general nature and does not take into account the particular circumstances or needs of any specific person. The rating may be subject to change at any time. Only licensed financial advisers may use the SQM Research star rating system in determining whether an investment is appropriate to a person’s particular circumstances or needs. You should read the product disclosure statement and consult a licensed financial adviser before making an investment decision in relation to this investment product. SQM Research receives a fee from the Fund Manager for the research and rating of the managed investment scheme.