Mounting housing risk in Australia and global volatility has pushed one of Australia’s best performing fund managers to boost cash levels, and slash exposure to real estate investment trusts and mortgage bonds.
Perpetual has boosted cash positions to a six-month high of 14%, whittled down residential mortgage backed securities holdings to 12% of total portfolio and REITs to 2.5%, Vivek Prabhu, the head of fixed income at the Sydney-based fund manager said.
RMBS holdings made up 44% of the Prabhu’s portfolio in 2010 and REITs accounted for 15% in 2014.
Australian home prices have soared with values in Sydney doubling since 2009 prompting regulators to clamp down on speculative lending.
A gauge of global volatility spiked this month over the turmoil surrounding the Trump administration, which is facing scrutiny about whether the president asked the former head of the FBI to drop an investigation, and questions about his handling of secret intelligence.
“The residential property market has had a strong run and we are more cautious going ahead,” said Prabhu, who manages the asset managers’ $2 billion flagship fixed income Diversified Income Fund. “There are some pockets where supply is mounting and prices could be pressured.”
The first signs of a property slowdown are there with both Sydney and Melbourne home values dropping:
This week, S&P downgraded the credit score of of almost all mortgage lenders except the major banks, citing mounting housing risk.
Perpetual manages $7 billion in fixed income assets.
Its fixed income team uses a credit score, which it resets every fortnight, to guide its investment decisions.
The score ranges from -4 to +4 and stood at a +2 in March. However the score has dropped to neutral, triggering Perpetual to boost cash holdings, Prabhu said.
The credit score is compiled using credit spread valuations, macro economic indicators, bond market demand and supply, and technical indicators.
Perpetual, which Morningstar Inc. ranked the top-performing fund manager for Australian fixed income last year, has a $7 billion portfolio with a bulk of that invested in corporate credit, financial and asset-backed bonds.
It likes monopolistic or oligopolistic infrastructure like ports, toll roads and airports, as they gain from the tourism influx and trade.
The fund manager has also ratcheted up its holdings of domestic and offshore banks and financials to just over a third of its portfolio and that has helped returns, Prabhu said.
The fund’s returns have surpassed the benchmark index performance. In the past 12 months, the Wholesale Diversified Income Fund returned 5.24% after fees compared with 1.9% for the benchmark Australian bond index, according to a report on the fund manager’s website.
The banks are well-placed to “withstand a housing shock following a strengthening of regulatory requirements”, Prabhu said.
“We are quite comfortable with the banks after all the work done by regulators to bolster the lenders capital ratios and liquidity requirements and more recently the introduction of macro prudential measures to curb speculative lending.”
The largest banks raised a record $20 billion in capital in 2015 in response to regulatory changes and have more than doubled the average equity they hold since 2009. The regulator has also directed them to limit speculative lending.
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