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Russell International Bond

Ksenia Zaychuk (ksenia.zaychuk@morningstar.com)

en-AU Frequent team changes require time to settle. London-based head of Fixed Income Portfolio Management, Gerard Fitzpatrick, picked up lead responsibilities for Russell International Bond in March 2019. The change resulted after a wider global restructuring conducted by Russell that saw the former portfolio manager, James Mitchell, leaving the firm. Fitzpatrick was previously portfolio manager for this product before switching roles with back-up Albert Jalso in 2011. Jalso in turn had switched places with his back-up Mitchell in 2016. Fitzpatrick has been responsible for the management and performance of the firm's fixed-income capabilities globally since 2013 and is a member of the firm's global investment strategy team and investment leadership team. Before joining Russell in 2007, Fitzpatrick was a CEO of West End Capital (Bermuda) Advisors Ltd and a director for Treasury Asset Management at the Bank of Bermuda. Fitzpatrick's back-up for this strategy is Austin Loke, who joined the firm in 2011. Russell has a dedicated fixed-income manager research team led by Adam Smears. This unit handles due diligence on the universe of fixed-interest strategies and is also increasingly relied upon to express a view on a particular sector or asset class to inform the portfolio managers. Portfolio manager incentives are tied largely to one- and three-year fund performance. This incorporates both broad and specialist mandates, with a side of internally managed strategies. Russell International Bond mostly invests into externally managed vehicles. As at 30 Nov 2019, it held Colchester (global sovereign and currencies, 23%), Voya (global aggregate, 12%), Insight Investment (global sovereign and credit, 20%), BlueBay (global sovereign and credit, 20%), Schroders (securitised assets, 10%), and two internal Russell vehicles--one focused on sovereign bonds with the highest real interest rates (8%) and the other on currencies (7%). Russell has stuck by Colchester for several years but has switched things up more regularly since 2011. It removed the underperforming Strategic (tactical currency and interest rates) in 2014 after hiring this manager in late 2012. In 2015, Russell also switched from its internally managed Absolute Return Bond (appointed in 2013) to the currency-positioning sleeve, wanting more liquidity and less scope to make interest-rate duration calls, and added its own real interest rates capability in October 2016 before exiting its stake in Loomis in July 2017. The shop funded capabilities from BlueBay and Insight from Pimco, Loomis Sayles, and Colchester in May 2015. Voya replaced the long-standing Pimco strategy in 2019. Russell International Bond can act as a diverse, core global fixed-interest vehicle, though it can take meaningful credit risk and exhibit an emerging-markets tilt. The assets for the strategy in Australia reached AUD 1.4 billion at 30 Nov 2019. Supplements external subadvisors with internally derived views. Russell International Bond is a multimanager benchmarked against the Bloomberg Barclays Global Aggregate Index (AUD hedged). Russell selects underlying investment managers and designs mandates on the basis of perceived manager strengths. An in-house fund research team examines potential managers and provides a report and recommendation to the firm's portfolio managers. The portfolio manager surveys the market, tapping into the house's macroeconomic strategists and developing forward-looking views. When Russell thinks its views are better implemented by a specialist manager, it will allocate the relevant percentage accordingly, after a comprehensive internal process, including a sign-off by the global chief investment officer. Russell can tilt the portfolio between submanagers, and by extension the underlying sectors, by up to 10%. However, moves of this magnitude are rare over the shorter term, and any change over 10% is subject to an internal committee approval process. Russell chooses in-house strategies when the manager desires a particular exposure, such as a currency tilt or macro overlay. Staff monitors duration, credit quality, and sector bets, keeping duration +/-2 years of the index. While the process is benchmark-aware, there can be some considerable differences, with the biggest overweighting being emerging markets, a sector considered a long-term allocation.

This portfolio is well diversified across multiple sectors of fixed interest and is well positioned to serve as a core allocation, though investors should be aware that it can exhibit a meaningful emerging-markets tilt. Core Solid roster of underlying managers and experience at the helm, but fees detract. Notwithstanding its comparatively higher fee and continuous corporate uncertainty, we believe Russell International Bond showcases some smart selection of submanagers and remains an investable solution. The acquisition of Russell Investments by private equity firm TA Associates in 2016 was followed by staff reshuffles, which require some time to settle. James Mitchell, who was in charge of the strategy since 2016 after taking over from Albert Jalso, got replaced by Gerard Fitzpatrick in March 2019. Although there is concern about replacing the lead manager after such a short period of time, we are encouraged that Fitzpatrick, a seasoned fixed-income investor and a portfolio manager for this strategy prior to 2011, returned. He has been responsible for the management and performance of the firm's fixed-income capabilities globally since 2013 and is a member of the firm's global investment strategy team and its investment leadership team. We believe his familiarity with the strategy offers continuity and stronger potential. Fitzpatrick is ably supported by in-house manager research and macroeconomic strategist teams. We view some of the underlying vehicles as reputable and we like the patience and conviction with the subadvisors that the strategy has shown. Long-standing vehicles, Colchester and Schroders are supplemented by a newer addition of Voya which replaced PIMCO in 2019. In addition to external managers, Russell International Bond has a 15% allocation to its proprietary internally managed vehicles, one focused on real interest rates and the other on currencies. While the currency strategy has added value since its addition to the portfolio, the interest-rate vehicle is rather simplistic (based on consensus inflation expectations) and is yet to prove itself. Investors also need to keep in mind the tilt to emerging markets and lower-credit-quality securities. Over the longer term, the strategy has delivered strong results; however, the hefty fee of 0.73% makes this strategy an expensive choice. Overall, Russell International Bond remains a functional offering, in spite of a few limiting facets. 1432 1432 Tim Wong Tim Wong, CFA Private equity firm TA Associates' 2016 purchase of Russell Investments brought welcome clarity following two years of ownership uncertainties. Still, some moves have more clearly benefited company shareholders rather than fundholders: the firm cut its marketing, sales, and HR teams while simultaneously issuing USD 200 million in debt that was then paid to shareholders. Having an owner looking to exit over the medium term isn't conducive to fostering a sustainable, longer-term business strategy.

Executive changes included the appointments of CEO Michelle Seitz and global CIO Pete Gunning in September 2017 and October 2018, respectively. While Seitz was an external hire, Gunning held this role for several years before transferring internally in 2013. Russell enacted 12 redundancies across its investment team in March 2019, moving away from asset class linked reporting lines to instead emphasise its multi-asset capabilities. More consistent views globally were sought. Such changes make us watchful particularly as staff continuity has been a feature, but we're conscious the redundancies are a relatively small proportion. Russell's approach to selecting subadvisors remains solid and the foundation of its portfolios. That said, it has been increasingly managing money in-house and applying its own views, and a competitive edge in these endeavours hasn't always been evident. We're monitoring its owner's intentions, while Russell prioritises its multiasset strategies. 2019-04-01T00:50:00 2019-04-01T05:50:00Z Solid results over longer periods. Russell International Bond has consistently outperformed most rivals over the short, medium, and long term; it lagged the index over the one- and three-year terms but delivered solid numbers over 10- and 15-year periods (as at 31 Dec 2019). Strong outperformance in 2016 and 2017 continued through the first quarter of 2018 before falling away in the second half of the year. The return profile is good with returns on average in positive quarters being double that of negative quarters over the past five years. Rolling 12-month attribution (to 30 Sept 2019) has been mixed across the underlying managers. Schroders and Colchester were the biggest detractors with their credit and currency positioning, respectively. Insight, with its positions in rates, contributed but only marginally. The Russell-run rates positioning strategy contributed as being overweight the UK and US helped returns. Since the addition of the overlays in 2015 and 2016, respectively, the currency positions have added value while the rates strategy has detracted. In 2015 Russell had trailed the benchmark as a result of Bluebay's high-yield and emerging-markets exposure and the since-cut Russell Absolute Return Bond. The strategy surpassed the index during 2016 and through 2017 with allocations to Schroders and Bluebay faring well and offsetting the initial struggles of the real interest rates sleeve during 2016. It's critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category's second-costliest quintile. That's poor, and based on our assessment of the fund's People, Process and Parent pillars in the context of these fees, we don't think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral. F0AUS070L6 LiveRussell International Bond