June 2024
Investment Objective Investment Strategy Target Return Investment Highlights
APIR ETL0072AU
Entry / Exit Price $1.0676/1.0666
Fund Size $50m
Liquidity Daily
Distributions Quarterly
Inception Date 31 May 2009
Income Distributions
2023/24
JUN
DEC
MAR
Distribution (CPU)
1.01
1.68
1.19
Fund Rating
Top 10 Securities
CBA 30’25
5.74%
IAG 45'25
4.09%
5.61%
Ausgrid
4.09%
ANZ 34’29
5.19%
Victoria Power Network
4.07%
NAB 27'25
5.44%
Paccar 27
4.02%
ANZ 31’26
4.13%
Paccar 26
2.51%
Platforms
AMG Super
Bell Direct
HUB24
netwealth
Ausmaq
CMC Stockbroking
mFund
Powerwrap
Australian Money Market
Freedom of Choice
Nabtrade
uXchange
Market Commentary
June was yet another month of two parts. Market expectations drove yields lower as participants thought that a rate cut was likely. These hopes were dashed when data released earlier in the month suggested that the economy was heating up and inflation could be difficult to tame. The PCE release tempered those thoughts and bond yields rallied and rates fell, until Macron called an early election and the market feared that the far right could win and change the business outlook. Bonds and interest rates were sold and as such rates and yields rose.
The outlook for an easing of interest rates by the Federal Reserve is changing day by day. The various members of the Federal Reserve and the Regional Federal Reserve Banks are suggesting caution. It appears that the Federal Reserve may choose to wait until more data is gathered and the election has passed, especially given the current high political stakes and a former President’s in waiting view. Trump looks to be the likely winner in the coming election. As such we may see rates on hold until there is certainty around his suggested policies.
Should Trump be elected, and a number of his stated policies come into effect, we could easily see a spike in rates due to his growth and tax policies. As it stands, the U.S. has a high debt to GDP and any easing of taxes means less revenue. This loss is supposed to be captured by tariffs to be imposed, however, modelling by a number of parties, including Treasury suggests otherwise. Should the bond vigilantes become nervous, and the amount of issuance increases, markets could easily weaken.
Australia appears to be an unlikely passenger. Our own RBA would be concerned by the recent inflation number and no doubt would be looking for more data. The trend however suggests that inflation is steady and may even be rising again. If the RBA forms the view that more work is required, then we could see rates and bond yields rise. This rise would be different to the reasons why the U.S. could see interest rates rise.
There is conjecture that the RBA may hike rates in the near future. This remains a possibility because inflation remains persistent. I will add a note of caution as insolvency work has been steadily increasing and the retail spend diminishing. Some economists are pitching for a hike soon but have a rate cut pencilled in February / March.
As such the outlook looks volatile especially for fixed rate securities.
The portfolio in a rising rate environment should see extra income as the higher interest rate are reflected in the coupon resets. The low duration means that returns are protected to an extent. The high average rating within the portfolio also acts as a mitigant.
Companies that have low leverage will benefit at the expense of those more highly leveraged companies. The outlook can be very different. Should interest rates fall then the environment is supportive of tighter spreads.
Portfolio Management
The main risk for markets at present is how markets will react to a second term of a Trump Presidency. The policies that Trump and his advisers are suggesting are seen as inflationary. It’s how markets react in the near term that will drive returns.
Currently markets are building in a friendly environment for business but a somewhat less optimistic view about interest rates and bond yields. Eventually this divergence breaks down and higher rates for longer and bond yields become relevant.
This means that credit at some point is impacted. However, credit will provide a safe haven to both rising bond yields and potentially falling equity markets.
The portfolio is positioned to take advantage of the current market with an eye to the future. The average credit quality has risen to a very strong A- equivalent portfolio rating.
The portfolio has benefitted as a result.
Currently the portfolio has widened its diversification by buying some kangaroo bonds where the parent has limited exposure to Australia. The portfolio has benefitted through compression in high beta securities. Bank Tier 2 sub is preferred, especially domestic banks.
Holdings in offshore banks have increased and this has provided some timely gains. We have seen solid compression in this sector. For example, the holding in Natwest has seen spreads tighten a further 6bp over the month. Demand for Bank Tier 2 sub has driven spread compression in bank majors by up to 20 bp during the month. This trend of spread compression will continue to remain supportive especially as demand for both A- and BBB Tier 2 securities remains strong.
The infrastructure sector will continue to be targeted. The portfolio will invest in quality entities within this sector as further diversification into the sector will continue to improve the underlying risk profile of the portfolio.
The Portfolio has several maturities in the next 3 months. These maturities will allow some reinvestment at higher interest rate levels and provide opportunities for further diversification and investments.
As insurance, the portfolio has increased its weighting of fixed income securities marginally.
The increase is in the form of several new issue bonds with a tenor of three years.
The focus as always is to produce positive returns and minimize any negative returns. The Fund is positioned to take advantage of new issues and any movement wider in credit spreads.
Meanwhile the Manager is looking for opportunities that will maintain spreads and maintain returns.
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