Colonial First State Global Asset Management's overriding objective when investing in fixed interest markets is to maximise the income that our funds earn over the longer term. We do this by investing in securities that offer the most attractive potential returns for their risk. Financial markets are often driven by short-term factors that result in market yields trading to levels that are considerably above or below appropriate hurdle rates. These market movements provide opportunities for us to increase or decrease our holdings of various securities depending upon whether they offer 'value for risk'. In relation to cash funds, this mainly relates to adjusting the average term to maturity of the portfolio, but also covers different credit ratings of issuers and also the mix of short-term assets (such as bank bills) versus floating rate notes. We monitor these markets closely so that we can exploit opportunities when they arise.
We apply our philosophy through a process that involves the following key steps:
- Quantifying each of the risk characteristics of an asset, including term risk, credit risk, liquidity risk and market volatility. This enables the determination of fair value yield levels for each asset.
- Monitoring markets to determine the level of yields available across the range of potential investments in our funds.
- Building portfolios that are most heavily concentrated on assets that offer a yield that exceeds required risk premia, ie which offer 'value for risk'.
- Managing overall portfolio risk levels through diversification guidelines and an accumulation approach to implementing strategy changes that evaluates the strength of market trends at any point in time.
Performance/risk objectives The Colonial First State Global Asset Management suite of cash funds aims to generate returns (before tax and fees and assuming income reinvestment) comparable to the return of the Australian money market by investing in overnight cash deposits, bank bills and floating rate bank, corporate and asset-backed securities where applicable.
In general, value is derived from duration management, with contributions from yield curve positioning, sector allocation and security selection. The exact contributions vary with the stage of the interest rate cycle. For example, during periods of fluctuations in monetary policy and therefore the cash rate, duration management is the most consistent contributor to value-added; whereas during periods of interest rate stability, diversification into quality, high yielding corporate/credit securities and floating rate securities becomes a more important source of value-added.
