The 0.25% cut to the Official Cash Rate by the RBA in February has led to speculation that further rate cuts are on the cards, keeping downward pressure on interest rates.

If that’s the case, does that mean a portfolio manager of a Credit or Fixed Income Fund will increase interest rate duration to lock in higher interest rates before further falls in rates?

While this strategy will pay off if interest rates keep falling and therefore increase the value of the underling assets, the problem is if the opposite applies, and rates unexpectedly rise instead of fall.

Higher duration funds have higher sensitivity to interest rates, and are more exposed to directional interest rate movements, which in turn can lead to higher volatility.

The higher the duration the higher the loss if rates don’t go your way and given there is no crystal ball with directional interest rate movements, as central banks have found out over the last few years, it could amplify mark to market losses.

This translates into a higher chance of fluctuating returns. That is, one month positive the next month negative, which is not the consistency we are striving for at AL Capital.

AL Capital Global Credit Fund prides itself on the consistency of its returns. Since inception, the fund has never posted a negative month’s return.

When you consider AL Capital’s Global Credit Fund’s typical investor is seeking reliable and consistent returns, it important that duration and sensitivity to interest rate fluctuations is monitored closely.

That’s not to say duration won’t increase from its current level of 0.4 years, provided consistent positive returns is achieved.

Investors in AL Capital’s Global Credit Fund not only enjoy the peace of mind that consistent returns provide, they also enjoy daily liquidity, quarterly distributions and a “Superior” SQM rating.

Phil Smith | AL Capital
Head of Distribution | Director

For more details and to explore how you can invest with AL Capital, please contact our dedicated client relationship team today.