Looking for income? Here are 5 of the best-performing fixed income funds in Australia last year

The global fixed income market had a remarkable - and at times, confounding - 2023. Recession fears and the higher yield for longer consensus, which dominated the start of the year, eventually gave way to a soft landing and lower yield reality by the end of it. 

A brief look at the calendar 2023 returns reflects not only this shift - but also how much one month made a difference. High yield and corporate credit, which should have been under pressure from lower earnings and higher debt repayment costs, instead ended the year with the best returns of the asset class. Even emerging market debt, which doesn't normally rate a mention on this website, returned double digits.

So which bond funds were able to capitalise on these trends? And how are they positioned ahead of 2024 given the new consensus of rate cuts and "immaculate" disinflation?

In this wire, I'll introduce you to the five best-performing fixed income funds in the Livewire funds database. 

How we compiled the list

The following list was compiled using the information in Livewire's Find Funds feature.

• In the “Fund type” box, select “Managed Funds”

• In “Asset Class”, select “Fixed Income - Australia and Fixed Income - Global”

• We then sorted the results based on 1-year returns.

Note: Fund performance is also typically viewed over longer timeframes than one year (i.e. three-year and five-year rolling periods).

The table below simply captures the best-performing fixed-income funds for the past 12 months. All data is supplied by Morningstar. If you would like to conduct your own research into top-performing funds, you can do so by clicking here.

Source: Morningstar, as of 10 January 2024

1. Fortlake Real-Income Fund

For the second year running, the flagship funds at Fortlake Asset Management have made the top five list. And for the second year in a row, Fortlake's Real-Income Fund tops the list. 

The fund is focused on delivering absolute returns and has a limitless remit in this regard. That means it can go anywhere geographically and into any part of the broad fixed income universe to earn its returns. The fund is also open to retail investors.

2. Ares Diversified Credit Fund

A fund that primarily loans directly to American and European corporations takes out the number two spot. The Ares Diversified Credit Fund, run out of New York by Mitch Goldstein and Greg Margolies, invests in a range of liquid and illiquid fixed income investments to generate outsized returns in various market cycles.

More than 60% of the portfolio's current holdings are in direct lending - a type of financing where investors provide loans directly to companies, typically bypassing traditional banks and other financial institutions. It is a subset of private debt, focusing on loans to mid-market companies.

The fund also invests in real estate debt, collateralised loan obligations (or CLOs), and publicly traded high yield bonds. The fund is available primarily to wholesale investors, given its minimum investment threshold of $100,000.

3. T. Rowe Price Global High Income Fund

Keeping with the high yield theme, the third place-getter in this list invests primarily in global high yield debt. As portfolio manager Mike Della Vedova points out, the reputation that high yield debt has borne since the Global Financial Crisis no longer applies. As he wrote in a recent Livewire wire, high yield products don't succumb to the same economic pressures as they once did.

"The current high yield market is drastically improved compared with the GFC in terms of credit quality," Della Vedova wrote.

In late 2023, high yield credit also had a strong correlation with equities meaning prices rallied and yields fell across the asset class - which helped its strong performance figures. High yield debt is also generally a short-duration market, meaning big swings in rates market volatility have actually helped high yield returns even more.

The fund is available in two classes - I (for wholesale, minimum investment of $500,000) and S (for retail, minimum investment of $50,000). 

4. Fortlake Real-Higher Income Fund

Run by the same team as the Fortlake Real-Income Fund, the team use quantitative tools and an absolute return initiative to generate a target return of 4-5% above the RBA's current cash rate. It achieved that last year (and then some). 

5. Realm Strategic Income Fund

Unlike the other funds on this list, the Realm Strategic Income Fund is primarily invested in RMBS (residential mortgage-backed securities) facilities. RMBSs are bundles of shares in mortgages - with the income coming from borrowers making their regular repayments. And as you might expect, an RMBS is beholden to the housing cycle and any uptick in arrears can reduce the value of those packages.

It also has investments in Structured Secured Facilities - a type of loan that is backed by collateral. These investment vehicles are often used in complex financings, such as leveraged buyouts and project finance.

The minimum investment for this fund is $5,000.

This article was first published on Livewire Markets.