Calls for more “nuanced” bond benchmarks

As the 2022 market environment and conditions have thrust fixed income investing and defensive allocations in portfolios back into the spotlight, there have been calls to develop new benchmarks that have a more “nuanced” approach in the debt market universe.

Kevin Toohey, Principal at Atchison Consultants, said investors have been confronted with a turnaround in long duration bonds and a surge in credit spreads, which hasn’t been helped by non-holistic and inaccurate benchmarking.

“Whole categories of securities are excluded from the fixed income benchmarks, with relevance to the financial advice sector now that the Your Future Your Super has effectively pegged industry and My Super Australian debt exposures against the Composite index universe,” he said, referring to the composition of the Bloomberg AusBond Composite index.

“This only includes eight sectors of the fixed income market including Federal and State Government and then into corporate and some fixed rate Residential Mortgage-Backed Securities or RMBS.

“It explicitly excludes floating rate RMBS, anything below investment grade, along with the extensive range of other asset-backed options that make up a substantial portion of the Australian debt market.”

Toohey noted this approach to benchmarking only captures a “slice” of the debt market world and disadvantages investors who are interested in other parts of the sector that benchmark against the Bank Bill Index, only considering the performance of bank-issued short-term bills.

“The first [opportunity for financial advisers is] … whether a more nuanced benchmarking of fixed income allocations is warranted, such as splitting this into Fixed, Floating and Inflation-Linked sleeves,” he said.

He warned financial advisers about understanding the limitations of traditional fixed income benchmarks and looking for alternative opportunities for investor clients.

“Using the AusBond Composite benchmark to measure performance of debt markets is like only using the election result of Queensland to call the Federal election,” he said.