NZB - Smartshares bond fund

I understand the value of typical bonds are inversely linked to interest rates - the bond value drops as rates rise.

I'm wondering if this particular fund works the same way or would it rise with interest rates?

E.g. as new money enters the fund it regularly resets/refreshes by averaging into new bonds at higher rates. I think it also holds some inflation linked bonds that reset...

Or is it more 'locked in' than this so that any interest rate rise would lower the value of the fund?

It's price history doesn't go back far enough to see how it performs in different interest rate environments.

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Originally Posted by maknz

I understand the value of typical bonds are inversely linked to interest rates - the bond value drops as rates rise.

I'm wondering if this particular fund works the same way or would it rise with interest rates?

E.g. as new money enters the fund it regularly resets/refreshes by averaging into new bonds at higher rates. I think it also holds some inflation linked bonds that reset...

Or is it more 'locked in' than this so that any interest rate rise would lower the value of the fund?

It's price history doesn't go back far enough to see how it performs in different interest rate environments.

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Well the units in the bond fund are priced mark to market... This means the unit price of the fund will most definitely be impacted by the movement in interest rates.. even if you, yourself are happy to buy and hold, the fund manager will have to track the fair value of the fund as $ comes and goes (and so they can calculate their fee as a % of FUM)... while any new investments the fund makes will of course be able to take advantage of higher rate bonds(if rates rise), the vast majority of the funds assets will already be invested, right? (Unless they are an active manager who is sitting on a large cash position)..

In short, assuming the majority of the assets in the fund are fixed interest you should expect the value to fall if interest rates rise, likewise if rates fall the value of the fixed interest assets should rise.. it's possible though the fund may hold some variable rate instruments which may balance this out a bit..

I haven't looked at NBZs asset mix.. perhaps you could find out from smartshares?

HTH

If this fund is constantly cycling through old to new bonds, then as interest rates increase the fund value increases. So contrary to your argument, the fund will increase in value as interest rates increase?

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Originally Posted by Jonboyz

If this fund is constantly cycling through old to new bonds, then as interest rates increase the fund value increases. So contrary to your argument, the fund will increase in value as interest rates increase?

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That depends on the rate of re-cycling. The weight of numbers will probably remain with the "old" bonds, whose value will decrease, for some time. It depends on the laddering of the portfolio.

This is an interesting fund. It has competing characteristics of a standard share (exchange-traded so at the whim of individual investors) versus characteristics of a bond (value imbued by the bonds it currently holds).

In terms of inherent value, the fund will lag behind interest rates of new bonds but should be highly predictable in following interest rate trend averages. Currently 5.03% yield (subtract 0.54% fund fees).

On the otherhand, the actual fund price depends on whether investors understand and trust how this fund works differently compared to stock-based funds. At the moment, I don't see this happening based on the NZB.NZ chart movements. It's only been around less than 2 years but it's price seems to dip/rise parallel to the general market. The uploaded image shows NZB.NZ rises and falls similarly to the FNZ.NZ fund. The NZB price does change much less though.


Attachment 8893

I've fowarded this thread to smartshares to see if they have any comments.

I found good info in section 10. of their full year report (financial risk management) showing how a 100 basis point increase or decrease is expected to effect their value. The value will drop with a rate increase and rise with a decrease as expected. Some of their rates are floating so there would be some income increase/decrease to partially off-set this, although minimal compared to the overall value change.

Section 10. also shows a table of the laddering.