Henderson

Henderson Australian Fixed interest Bond Fund APIR: IOF0046AU

This is a fund managed by Henderson Global Investors. It describes itself as medium risk and holds cash and fixed interest securities. The fund had $347 million under management as at August 2016. This is a considerably smaller fund than the PIMCO fund we’ll also profile this week, but notably it has no buy/sell spread and lower fees.

The objective of the fund is to exceed the Bloomberg Ausbond Composite 0+ Year index over a rolling three-year period. The fund holds more than 50% of its investments in securities rated AAA or AA. The fund is rated five stars overall by Morningstar. Henderson Global Investors (Australia) Funds Management Limited is the responsible body. The fund invests into the institutional Henderson fund and is a well-known asset manager.

Fund documents as at August 2016 show a three year net return of 6.13%, five years at 6.52%. The minimum investment is $25 000 and fees are 0.47% of the net asset value of the fund. There is currently no buy/sell spread.

The bond fund is a relatively liquid investment: in the PDS the fund undertakes to process withdrawals within six business days. However, it is possible for withdrawals to be frozen in extraordinary circumstances and you should be aware of these before investing. The minimum withdrawal is $5000 and you may be required to keep your balance in the fund at or above $25 000. The modified duration of the fund is currently 4.53 years, compared to the benchmark index duration of 4.93 years.

Distributions are intended to be quarterly, but in some circumstances the fund may choose not to make distributions and does not make a guarantee of a certain level of income.

There is some good information available about this fund if you’re ready to research this product further. Morningstar has a detailed report here. The fund website is here and provides links to the product disclosure statements, fund updates and further information.

The graph below compares the annualized total returns of the Pimco and Henderson funds with the Bloomberg Ausbond 0+ Year index. Both funds match their benchmarked index very closely and the differences in returns are largely negligible. The two funds have similar durations (roughly, this describes the fund’s exposure to interest rate risk). The main difference between these funds are fees and the relative sizes of the funds.

hendson-graph

Data Source: InvestSmart, see here and here. Chart: The Constant Investor.

Depending on the size of the portfolio, it may not be possible for an individual investor to diversify adequately by picking individual bonds. Although the income from a bond fund like Henderson or Pimco will necessarily be variable, a bond fund offers an opportunity for the small investor to hold a diversified portfolio with exposure to bonds.

All bond funds are subject to macroeconomic events. Changes in bond prices or interest rates will affect the return and value of the fund. The current low yield environment may mean that as older bonds age out of the market and are replaced by newer ones with lower coupon rates the Bloomberg index may decrease over time. This may mean a lower rate of yield in the future than is currently being returned, even if the funds outperform the index on a consistent basis.

Changes in interest rates and bond prices will affect the return on the fund and its capital growth. The PDS outlines the risks of the product in detail and it’s worth taking the time to make sure you understand them.

A quality bond fund gives a smaller investor an opportunity to diversify into this class of asset while not focusing too heavily on a small number of companies. However, investors need to be aware that the fund is subject to the same economic events as all other investments and that past performance is no guarantee of future performance.