RaboDirect's Key Accounts & Investments Manager, Michael Courtney, recently caught up with Anthony Edmonds of Implemented Investment Solutions, who manage and distribute the Russell Investments Funds here in New Zealand. We asked Anthony his views on the Fund and some of the things investors need to be thinking about when considering this fund as an investment option.
Can you tell me a bit about the background of the Russell Investments Global Fixed Interest Fund?
Russell Investments have been managing global fixed interest on behalf of New Zealand investors since 1996. Russell has established a strong track record managing global fixed interest for New Zealand investors over the last 19 years.
After the portfolio investment entity (PIE) tax regime was introduced, Russell partnered with Implemented Investment Solutions (IIS) to make Russell's global investment management solutions and expertise accessible to New Zealand investors through PIE fund structures. Since inception in December 2011, the Russell Investments Global Fixed Interest Fund has grown to $656.6 million (as at 31 October 2015) and is widely used by investors in both the wholesale and retail segments of the market.
Can you explain more about Russell and Implemented Investment Solutions?
Russell Investments are a global investment management business headquartered in Seattle, with core capabilities extending across capital market insights, investment manager research, asset allocation, portfolio implementation and factor exposures. Their specialisation is in providing multi-style, multi-manager investment solutions through researching and combining different investment managers to deliver solutions that meet their investors' needs.
As mentioned earlier, Russell teamed up with local specialist investment management company Implemented Investment Solutions (IIS) to make Russell's solutions available to New Zealand investors through PIE fund structures (being the Russell Investment Funds). Russell is the investment manager of the Russell Investment Funds, while IIS are the manager, issuer and promoter of the funds. Since inception, the Russell Investment Funds have grown to over $955 million in funds under management. IIS is a licensed manager of Managed Investment Schemes under the Financial Markets Conduct Act 2013.
Can you explain a bit about the strategy behind the Russell Investments Global Fixed Interest Fund
The Russell Investments Global Fixed Interest Fund provides New Zealand investors with exposure to an actively managed, diversified portfolio of global fixed interest securities hedged to the New Zealand dollar. The Fund utilises a manager-of-managers approach with the specialist portfolio managers taking duration, country and currency positions to create a highly diversified actively managed global fixed interest portfolio. In recent times, key strategic themes within the fund have included holding a defensive shorter-than-index duration position, holding an overweight position in emerging market debt, corporate credit and an underweight in sovereign debt.
You mentioned the fund takes a "manager-of-managers" approach, can you elaborate on this?
The global fixed interest market is an extremely large universe and has a much greater opportunity set than the New Zealand fixed interest market. Russell believe that investment managers have strong capabilities in different areas and so rather than using one manager across the entire global fixed interest universe, Russell want to utilise a combination of managers with competitive advantages in distinct skill sets and different parts of the global market.
Each of the current specialist underlying managers in the Russell Investments Global Fixed Interest Fund have different expertise and skills across areas such as managing levels of interest rate (duration) risk, currency risk or credit risk. The differences in the approaches taken by managers mean that a multi-manager portfolio can harness a range of skills and perspectives, with the objective of providing a smoother, more consistent pattern of outperformance than is typically available from a single active investment manager in this asset class.
The Fund's current underlying specialist managers are:
- Colchester Global Investors (24%)
- Loomis Sayles (17%)
- PIMCO (17%)
- Insight (15%)
- Brookfield (10%)
- BlueBay (10%)
- Russell positioning strategies (7%)
Each manager holds a discrete segregated portfolio of individual securities, which is managed against mandates tailored by Russell Investments. The managers have different investment focuses. For example, Colchester focuses on rates and currency management and will hold primarily Government securities. In contrast, Brookfield is a credit specialist who is focused on credit securities which includes sectors like non-agency mortgage backed securities
Can you tell us a bit about the Portfolio Manager for this Fund, where are they based and how long have they been managing the Fund?
Al Jalso, from Russell Investments, is the portfolio manager for the underlying portfolio of the Russell Investments Global Fixed Interest Fund. Based in London, Al is responsible for the portfolio management of all Russell global bonds funds, a role he assumed in 2011. Al joined Russell in 2007 and was a portfolio manager in Russell's Seattle office managing core plus, short duration and stable value portfolios prior to taking over the management of the Russell Investments Global Fixed Interest Fund. Al is supported by Russell's global fixed income team, which consists of staff in Seattle, London and Sydney.
When someone invests in the Fund, where is the money invested?
The Fund's portfolio is comprised of an actively managed diversified portfolio of global fixed interest securities. The underlying portfolio currently invests in more than 1,000 global fixed interest securities, which includes international government bonds denominated in a variety of currencies, investment grade corporate bonds, and securitised debt such as asset-back securities across both developed and emerging markets around the globe. The overall portfolio is hedged back to NZ dollars.
How does the Portfolio Manager decide what the most suitable/appropriate investment options are for the Fund?
Russell Investments is responsible for determining and building the overall portfolio structure within the Fund. The Fund's overall portfolio manager Al Jalso monitors the entire portfolio and determines the weightings to each underlying manager to ensure the Fund as a whole is invested in line with its investment guidelines (separate from the underlying manager guidelines). As mentioned earlier, each of the underlying specialist managers holds a discrete segregated portfolio of individual securities, which is managed against investment guidelines that are tailored by Russell Investments. These guidelines dictate the style and also the scope of where and how each manager invests.
How would you describe the performance of the Fund? And what sort of performance should customers expect from this Fund going forward?
Since inception of the underlying global fixed interest strategy in 1996, Russell have established a strong track record outperforming the Barclays Global Aggregate Index $NZ Hedged over the long term.
For the 1, 3 and 5 years to 31 October 2015 the Fund returned 5.77%, 6.77%, and 7.97% per annum gross of fees and tax. Note that past performance is not an indicator of future returns. Globally interest rates have fallen to low levels, which suggests that returns looking forward are going to be lower than what they have been in the past. Also, like all investment markets and funds, there are risks associated with investing in the Fund, which means that over any given period returns can be volatile and even negative. Investors should make sure that they understand these risks, and we recommend they get independent advice on their investment needs.
What specific performance objectives do you set for the Fund?
The Fund aims to provide a total return, before costs and tax, 1% per annum over its benchmark (being the Barclays Global Aggregate Index $NZ Hedged) by having exposure to a highly diversified portfolio of global fixed interest securities hedged to the New Zealand dollar.
Could you explain your thoughts on the risk this Fund carries
In simple terms, typically investing in fixed interest investments exposures, like the Russell Investments Global Fixed Interest Fund, is more risky than investing in cash, but in the long-term should be less risky than investing in shares or companies. Accordingly we would think of this as a medium risk type investment.
Note that like any actively managed global fixed interest portfolio, there are a range of risks that investors are exposed to. These include interest rate risk, country risk, currency risk, and credit risk. Key within all of this is that the return of the Fund will vary, or in "investment-speak", be volatile. For example, if global interest rates rose suddenly this might see the Fund produce a negative return. Equally, events like a global financial crisis could have a negative impact on the return of the Fund.
As at 30 September 2015, the Fund had an overall credit rating of A. Note that the Fund may invest in below-invesment grade credit and as such currently has exposure to low grade and non-rated securities. Much of this exposure is through specialist underlying manager Brookfield (currently with a 10% weighting in the Fund) who specialise in researching and selecting non-agency residential mortgage-backed securities.
What methods does the Fund use to minimise foreign exchange risk?
The Russell Investments Global Fixed Interest Fund targets being fully hedged to New Zealand dollars, which aims to minimise the effect of currency fluctuations and foreign exchange risk. Note that some foreign currency exposures are likely to remain unhedged, due to active currency positions taken by the specialist underlying managers.
Has the Fund paid distributions? If so when?
Yes – the Russell Investments Global Fixed Interest Fund has paid distributions to unit holders on a semi-annual basis (being at the end of March and September each year). Since inception, the distribution amount paid to unit holders has been 2 cents per unit each six months. The Manager is responsible for determining if distributions are paid in any given period.
For someone who is new to managed funds, what are some important considerations to take into account before investing?
For any investment, investors need to understand whether it is right for them, and their specific circumstances. This involves reading and understanding the disclosure material, and getting independent financial advice to make sure any fund is appropriate to their needs. For the Russell Investments Global Fixed Interest Fund people should read the disclosure material for the Russell Investment Funds, and get advice on whether the Fund is right for their needs.
How would you see this Fund fitting into investors' portfolios?
We see the Fund potentially forming part of some investors' wider portfolios, so sitting alongside other types of investments like shares, property and cash, as well as New Zealand investments. To this extent the Fund might form part of a core fixed interest exposure within an investor's overall portfolio. This reflects that the Fund provides a high level of diversification across the global fixed interest market, with a greater opportunity set available across global sovereign debt, corporate debt, credit, and emerging markets.
To the extent that any information, analysis, opinions or views provided above constitute advice, they do not take into account any person's particular financial situation or goals and, accordingly, do not constitute personalised advice under the Financial Advisers Act 2008, nor do they constitute advice of a legal, tax, accounting or other nature to any persons.