Portfolio Talk: Fergus McDonald
Royal & SunAlliance fixed interest manager Fergus McDonald explains what a fixed interest portfolio should look like in 1999.
Sunday, February 14th 1999, 12:00AM
Senior fixed interest fund manager at Royal & Sun Alliance Asset Management, Fergus McDonald, nurtures a spread of portfolios worth around $1.5 billion. However, he claims to leave the office by 5.30pm most days - "you’ve got to have a balanced life" - to enjoy a game of golf and also find time for relaxing with friends at the beach or round the barbecue. Then there’s the endless taxi-driving familiar to anyone with young children: Fergus has three, with the oldest now 11.
Which funds are you responsible for?
The Royal & Sun Alliance range of fixed interest and cash portfolios that we manage in New Zealand. I also look after the currency hedging of the New Zealand dollar of our international fixed interest portfolio and currency hedging of the international equity portfolio.
The financial planning network probably best knows three of our unit trusts: the New Zealand fixed interest trust (which has around $12 million), the corporate bond trust ($22 million) and the cash management trust ($4 million).
How long have you been in this position?
Royal & Sun Alliance has been acquiring various life companies and fund management companies over the past couple of years. In March 1998 it bought Norwich, where I had been since 1990, and I joined them then. I’ve been working in the financial markets since 1980/81 and prior to working at Norwich was at Francis Allison Symes. After I left ’varsity (I did an economics degree at Victoria), my first job was in industrial relations...that was before I saw the light!
What’s the appeal for you about working in this area?
I very much enjoy the financial markets, something which I guess I’ve spent the vast majority of my working life in. Also at Royal & Sun Alliance I can get involved as part of the asset allocation team for the balanced portfolio, which has given me quite a broad understanding of the wider investment markets: property, equities and so on.
Fixed interest markets (affect) different parts of the economy - swings in sentiment can flow through....If you think of interest rates as the lubricant of an economy, they can either (cause it to) seize up or run forward.
So what stage are we at?
We’ve been through a period of seizing up in early to mid 1998, when monetary policy was perhaps too tight, Asian problems and so on were impacting quite severely on the New Zealand scene. We tumbled into economic freefall and interest rates and the dollar fell significantly.
But from here, we’re forecasting a reasonably sustained pick-up in New Zealand. We’ve got good leading indicators - business and consumer sentiment, the ANZ Job Ads series. Last July the bank bill rates were 10 per cent and now they’re 4.25 per cent. That’s really given a kick-start to our economy
What are your main challenges for 1999, given low inflation and interest rates?
Having a low inflation, low interest rate environment is touted as a very good thing. But from an investor’s point of view, they used to have money at the bank at 8 to 10 per cent and now it’s at 4 to 5 per cent, so their income has really halved. That’s driven a lot of investors to seek alternative investments, as you’ve seen through the large support for Capital Properties and the resurgence of interest in high-yielding fixed interest securities.
It’s driven people to take more risk, not by being stupid but seeing that 4 per cent isn’t a great return for them.
How does that affect your strategy for the funds you manage?
We believe that interest rates have pretty much bottomed. We’re wary about continuing to put new money into fixed interest and we’re a little bit concerned that the fixed interest markets returned 14 per cent last year (that was what the Government Stock index did) as maybe that brings some expectations. We’re forecasting a return of about 5 per cent for 1999, lower than for equities.
We measure risk by looking at duration, and think it prudent as 1999 progresses to reduce risk (by moving to shorter-term investments). I still think there’s quite good value in the markets in two to four year maturity bonds, and if you can get reasonable quality corporate bond issues in that maturity as well.
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