After a pandemic-induced rollercoaster of policy settings, a number of central banks have either started cutting interest rates or are expected to shortly commence doing so. This follows a tumultuous few years in which policy interest rates in many countries fell to their lowest levels in recorded history, only for inflationary pressures to then build to multidecade highs. Fortunately, cost pressures have started to ease, and an orderly glide path of rate cuts is now on the agenda - even if potentially a bit later and smaller in magnitude than many had anticipated.

Against this backdrop, investors in cash products earned relatively high absolute returns for sitting on the sidelines. But with the rates falling, these low-risk products are likely to experience declining returns. Where, then, could investors look to reallocate? This article delves into some of Morningstar Manager Research’s current high-conviction fund ideas, highlighting strategies across a number of asset classes that our analysts rate highly.

Cash is no longer king

After 15 months without a change, the Reserve Bank of Australia, or RBA, cut its official cash rate in February 2025. The RBA joins a number of central banks that are cutting rates - including the US Federal Reserve, the European Central Bank, and the People’s Bank of China. The outlook implied by interest-rate futures suggests the RBA is expected to cut rates another 2 times over the next 12 months.

rba cash rate forecast

Fixed-Income Strategies

History tells us that rate-cut regimes can have a varied impact across fixed-income classes. Of course, when it comes to cash, the picture is much clearer - falling central bank rates lead to falling interest rates on short-term cash products and interest-earning accounts. With that in mind, we consider a number of fixed-income strategies to have strong forward-looking investment merit.

Pimco Australian Bond Fund

(Gold Medalist) 

People: High | Process: High | Parent: Above Average

This strategy retains its place among the upper echelons of Australian fixed-income strategies, with both an experienced local investment team and a robust process backed by deep, high-caliber global resources.

Benchmarked against the Bloomberg AusBond Composite 0+ Yr Index, Pimco’s global depth is a key differentiator - while a number of peers may leverage the insights of offshore teams for idea generation, this strategy truly “walks the walk” by permitting an allocation of up to 30% to overseas securities. This includes allocations to global credit classes covered by its excellent credit research and the implementation of relative value sovereign bond positions. The latter offers a particularly handy active return lever at the moment - a divergence in policy rates and increased volatility since 2022 when central bank intervention in bond markets was relaxed offers renewed scope to harness these capabilities. That said, the strategy’s extensive research backing doesn’t come cheap - fees are high versus peers.

Bentham Defensive Income A 

(Gold Medalist)

People: Above Average | Process: High | Parent: Above Average

A strong multisector credit manager, Bentham has a proven ability to navigate challenging investment markets under the investment leadership of veteran manager Richard Quin.

With a 10% limit to sub-investment-grade credit, Defensive Income offers investors a more conservative and risk-constrained alternative to Bentham's well-regarded, higher-risk Global Income flagship strategy. Nonetheless, it still affords access to Bentham’s levers for income generation and sustained longer-term returns. The manager adeptly identifies relative value across sectors and capital structure, combining top-down and bottom-up research. Interest-rate duration is also actively managed and can be raised to high, defensive levels, offering scope for a return tailwind in falling-yield conditions.

While Defensive Income has a relatively short track record, it can be expected to take high-conviction shifts in credit and interest rates over time, an area in which Bentham has historically had success.

iShares U.S. Treasury Bond AUDH ETF

(Gold Medalist)

People: Above Average | Process: Above Average | Parent: Above Average

Investors seeking defensive ballast for their portfolios may consider this recently launched Australian-dollar hedged iteration of iShares’s passive US Treasury bond exchange-traded fund. Its efficient approach and razor-thin expense ratio make it a compelling option.

Tracking the ICE U.S. Treasury Core Bond Index, the strategy effectively captures the full US Treasury yield curve. A relatively high effective interest-rate duration of around 5.7 years provides return sensitivity to interest-rate movements, offering the benefit of strong performance when yields are falling across the curve. Investors concerned about tight credit spreads need not worry with this offering - credit risk is virtually nonexistent, with each holding backed by the full faith and credit of the US government. This offers investors a place of refuge when credit markets sour - although with more risk comes more reward, and this fund leaves yield on the table by not reaching for riskier bonds.

Equity Strategies

Strategies with a growth style have historically tended to benefit from falling rates, and in 2024, this was certainly the case - even in markets such as Australia where the mere prospect of looming rate cuts offered a tailwind for returns. While equity strategies with more of a skew to value, quality, and income may not have enjoyed the limelight quite so much in 2024, they warrant attention as investors look for alternative income sources amid a falling rate environment.

Pendal Australian Share Fund

(Gold Medalist)

People: High | Process: High | Parent: Above Average

Stability, consistency, and reliability are the foundations upon which this large-cap, style-agnostic Australian equity strategy is built - and the reason it continues to receive our highest conviction. Pendal’s head of equities, Crispin Murray, has been the portfolio manager since 2003, and his impressive contribution to the strategy’s track record is also backed by an unusually large - but nonetheless stable and collaborative - investment team with an impressive average tenure of 15 years.

The strategy’s key strength is its bottom-up fundamental research, which focuses on factors that shift a company’s earnings quality and trajectory. Pendal's team assesses stocks on a number of qualitative and quantitative fronts, with differentiated insights captured via tailored engagements with primary and downstream stakeholders across the supply chain. The process does not exhibit sustained style tilts, showing a balance between value and growth names as the team tries to capture a wide variety of opportunities. The approach is one of high conviction - the portfolio typically numbers 45–50 shares.

Investors Mutual Equity Income

(Bronze Medalist)

People: Above Average | Process: Above Average | Parent: Average

Falling under the Australian equity income Morningstar Category, IML’s Equity Income strategy follows a quality value approach that is well-defined and disciplined while also striving to generate income. Comanagers Michael O’Neill and Tuan Luu bring complementary skillsets, with O’Neill handling stock positioning and Luu managing options exposures. Together, they have a collaborative approach backed by strong support from the wider IML group.

The firm’s comprehensive fundamental research and strict investment discipline are reflected in this strategy. A focus on stable cash flows and mature industries aims to generate above-market income without hindering alpha generation. The options program, which involves selling calls and puts based on valuation ranges, boosts distributions while maintaining capital appreciation. Indeed, the strategy has captured the recovering value premium, delivering on its promise of above-market income. For those seeking an income and value approach, this strategy remains a sound option with the potential for long-term alpha. 

MFS Global Equity Trust W

(Gold Medalist)

People: High | Process: High | Parent: High

This large-cap global equity strategy remains a winning proposition in multiple areas. It is led by two insightful portfolio managers - Roger Morley and Ryan McAllister - who actively harness the firm’s extensive research capabilities while patiently investing in reasonably priced companies with a steady growth outlook. MFS’s broader analyst team is utilized very effectively, with colleagues’ insights paramount in formulating a long-term investment perspective.

The process is entirely bottom-up, with fundamental research undertaken to identify firms with competitive edges, companies with solid industry positions, and strong management teams with well-defined business strategies. The straightforward and disciplined approach ignores index weightings, with a modest leaning toward steady-growth companies balanced by an emphasis on company valuations. Large blue-chip stocks dominate the portfolio, while the managers refrain from investing in the fastest-growing market segments. Patience and a preference for companies exhibiting enduring - if not always spectacular - growth are among the strategy’s hallmarks. The portfolio managers move slowly, holding many stocks through multiple business cycles.

Multi-Asset Strategies

Dimensional World Allocation 50/50 Trust

(Gold Medalist)

People: Above Average | Process: Above Average | Parent: High

Targeting a 50/50 asset mix between equities and bonds, this strategy’s philosophy systematically targets risk premiums backed by decades of research, tilting toward cheap, profitable stocks following the Fama-French model. As a result, the equity sleeve has a permanent skew to value and small-cap stocks. Meanwhile, the fixed-income team adjusts the duration and credit quality according to the yield curve and credit spreads, respectively, presenting a dynamic approach that adapts to market conditions.

The strategy is backed by a clear, systematic process that undergoes constant enhancement, with changes robustly vetted by impressively qualified committees; Fama and French themselves are members, and they are joined by Nobel laureate Robert C. Merton. A host of notable academics act as consultants to help review research, while portfolio management utilizes a team-based approach.

Performance can, at times, run contrary to expectations - such as bottom-quartile peer-relative returns in 2022 despite its tilt to value stocks - but the longer-term return story is a compelling one, ranking first quartile net-of-fees over the decade to end-2024.

 

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