BNZ gets more risky with intl bonds

A recent shake-up in world bond markets has prompted the BNZ International Bond Trust to overhaul its investment rules, allowing it to swap money out of ultra-safe government bonds into higher risk corporate bonds.

The trust will, from June 1, remove a limit on the amount it can investment in non-government securities, such as corporate bonds, bonds issues by government agencies and mortgage-backed bonds. Its holding of non-government bonds is expected to rise to about 50% of the fund, from well below 25% currently.

A requirement that securities be rated at least AA- will also go and in future up to 5% of the trust’s funds will be placed in high yielding securities. However, the trust’s managers will be expected to balance these against higher rated investments to achieve, over time, a weighted-average credit rating of AA- or better.

The trust will also swap its performance benchmark from the Salomon Smith Barney World Government Bond Index – which is based solely on sovereign debt - to the Lehman Global Aggregate Index, hedged into New Zealand dollars. The Lehman index is evenly split between sovereign and non-sovereign debt.

Credit Suisse Asset Management, which manages the $450 million fund, says the changes would lift its targeted rate of return from 6% to 7.5%.

The investment revamp was prompted by a sharp contraction in government bond markets that had shrunk investment opportunities and returns, Credit Suisse Asset Management deputy chairman Robert Parker says.

In the last two years governments around the world had been shrinking their sovereign bond markets by running surplus and buying back their bonds, Parker says.

Technology, easier access to markets and European Monetary Union had also squeezed the differences between country’s bond rates, reducing the ability of bond traders to make money, he says.

As a result, fund managers who stuck with government bonds faced reduced liquidity and a reduced ability to perform. Those investing in corporate bonds were in an expanding market with more opportunities to make money.

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