Australian bonds had just one job and they fluffed it badly in the March quarter, as they failed to provide a buffer against equity market volatility.

The first quarter of 2020 will not be fondly remembered by most investors in actively managed bond strategies, Morningstar director of manager research Tim Wong said.

“The inability of many strategies to provide a buffer against equity market volatility, particularly in globally-oriented and more flexible offerings, was disappointing,” he wrote in a report this week.

“The consensus position for several years has been to favour credit risk, to varying degrees, and this came unstuck.”

The only sector to do well by investors was government bonds, an area boosted by the Reserve Bank’s first foray into quantitative easing, as it launched a bond buying spree in mid-March to push quick cash into banks.

Yet Wong says even these were disrupted as fear spread to the highest grade bonds.

What this means is that building a bond portfolio in future that does what it is supposed to do — provide a counter to swings in equities — will be difficult.

“A repeat [of fear spreading to the safest bonds] would make constructing a diversified portfolio particularly tricky, especially as Australian interest rates approach zero alongside unconventional monetary policy being enacted,” Wong said.

“Such concerns should not be dismissed, though it’s worth remembering the basic tenet of favouring higher-quality fixed interest instruments as your first line of defence held firm.

“And keep in mind what role you expect these strategies to play. Notably, almost all of the strategies that suffered the largest declines during the first quarter of 2020 were marked as ‘Supporting Players’, which is indicative of the greater risks we think they possess.”


The best of bonds, the worst of bonds

Australian government bonds were a sanctuary in the storm but in March they were still buffeted.

Wong says few active local bond managers beat the benchmark Bloomberg AusBond Composite Index.

Few active rivals even generated positive returns, Wong said.

Indeed, for global bonds passive investments performed much better than actively managed ones.

The passive Vanguard International Fixed Interest Hedged ETF VIF led the way, with this government-bond portfolio avoiding the damage inflicted on credit securities.

Funds that dealt in credit and multi-strategy plays were hardest hit, mostly by less than 5 per cent but there were a few outliers that incurred painful losses.

These included Bentham Global Income, Payden Global Income Opportunities, and PIMCO Income.