Fixed Income
The dominant theme in fixed income for the year to 30 June 2026 was the shift higher in Australian yields, driven by a renewed inflation pulse and a reversal in the direction of monetary policy. Australian headline inflation lifted from 1.9% to 3.8% by December, largely due to the unwinding of energy and rental rebate programs. While this was expected to be a temporary effect due to rebasing, the oil shock related to the Gulf war provided a second inflation pulse, taking inflation to 4.6%, before easing to 4.0% as oil prices readjusted toward a peace accord , leading international and domestic fuel prices lower.
The RBA initially cut the cash rate by 25 basis points to 3.60% in August 2025, before reversing course in February 2026 with the first of three 25 basis point rate rises, becoming the first major central bank to commence a rate rise cycle. Australian bond yields rose from 4.30% to peak at 5.10% in mid-March, before easing with oil prices back to 4.73% by year end. As a result, sovereign bond indices returned 0.83%, reflecting the shift higher in yields. Semi-government bond indices generated 1.90% over the same period, supported by relatively higher accrual and roll down from a steeper yield curve.
In credit markets, the hunt for yield, low levels of realised volatility and implied defaults meant high grade credit performed particularly well over the year. Major bank bond yield spreads compressed by 16 basis points. Total yields lifted with the increase in RBA official rates, leading the floating rate corporate bond indices to return 4.88%. The fixed rate corporate bond indices generated 2.74%, reflecting spread compression, higher accrual and a shorter duration than other fixed rate indices.
The primary driver of outperformance across all Australian Ethical Altius fixed income funds was due to significant but selective overweight positions in credit. Within the floating rate credit income funds (which includes the Income Fund and Credit Income Fund), weightings toward Residential Mortgage Backed Securities and regional bank paper added value. T Credit Income Fund returned 5.25% for the year. Within the fixed rate portfolios (which includes the Short Duration Bond Fund, the Bond Fund and the Green and Sustainable Bond Fund), the substantial underweight to sovereign bonds, including a zero holding for the most part, added alpha. Overweight positions in credit and state government bonds were also key preferences through the period.
Active duration management, executed via synthetic overlay, also added to performance, meaning that the Australian Ethical Altius Green and Sustainable Bond Fund and the Australian Ethical Altius Short Duration Bond Fund outperformed their benchmarks on a duration basis. The Short Duration Bond Fund returned 4.02% for the year, while the Green and Sustainable Bond Fund returned 2.46%.
A notable new investment for year was made in the Brighte 2026 asset backed transaction. Brighte is a leading sustainable finance provider that supports the acceleration of the adoption of home solar, batteries storage, EV infrastructure and home electrification. For the 2026 transaction, 86.9% went to aligned green assets. With 30% of the pool being in solar, 26% in standalone battery storage and 25% in the combination of solar & battery systems.
Looking ahead, central banks are likely to retain a tightening bias in the near term as the earlier inflation shock continues to flow through the data. By the fourth quarter, however, lower oil prices – despite ongoing volatility – should begin to exert a disinflationary influence. A further surge in global oil production would add to that disinflationary impulse. Credit income portfolios should benefit from higher cash rates and a supportive credit environment, while fixed rate portfolios, are especially well placed if disinflationary conditions take hold.
A notable new investment for year was the Brighte asset backed transaction, a sustainable finance provider that supports the acceleration of the adoption of home solar, batteries storage, EV infrastructure and home electrification.
Fixed Income Funds: Performance vs benchmark*
| Since inception (% P.A.) | 5 years (% P.A.) | 3 years (% P.A.) | 1 year (%) | 3 months (%) | |
|---|---|---|---|---|---|
| Australian Ethical Altius Income Fund | 3.6 | 3.3 | 4.6 | 4.0 | 1.1 |
| Bloomberg AusBond Bank Bill ** | 3.9 | 3.1 | 4.2 | 3.9 | 1.1 |
| Alpha | -0.3 | 0.2 | 0.4 | 0.1 | 0.1 |
| Australian Ethical Altius Bond Fund (Wholesale) | 2.4 | 0.1 | 3.8 | 1.3 | 2.7 |
| Bloomberg AusBond Composite | 2.8 | 0.4 | 4.0 | 1.5 | 2.6 |
| Alpha | -0.4 | -0.2 | -0.2 | -0.2 | 0.0 |
| Australian Ethical Altius Short Duration Bond Fund (Ordinary) | 2.3 | 2.4 | 4.8 | 3.5 | 2.2 |
| Bloomberg AusBond Composite / RBA Cash Rate Target | 2.2 | 1.8 | 4.1 | 2.7 | 1.8 |
| Alpha | 0.1 | 0.6 | 0.7 | 0.8 | 0.3 |
| Australian Ethical Altius Green and Sustainable Bond Fund (Ordinary) | 0.3 | 0.4 | 4.4 | 2.2 | 3.0 |
| Bloomberg AusBond Composite | 0.2 | 0.4 | 4.0 | 1.5 | 2.6 |
| Alpha | 0.1 | 0.1 | 0.4 | 0.6 | 0.3 |
| Australian Ethical Altius Credit Income Fund (Ordinary) | 3.0 | 3.9 | 5.5 | 5.1 | 1.4 |
| Bloomberg AusBond Bank Bill | 2.2 | 3.1 | 4.2 | 3.9 | 1.1 |
| Alpha | 0.8 | 0.8 | 1.3 | 1.2 | 0.3 |
*All returns are net of fees. Find more information on these funds via the managed funds page on our website including Retail performance.
Past performance is not a reliable indicator of future returns.
Interests in Australian Ethical Managed Funds are issued by Australian Ethical Investment Ltd (ABN 47 003 188 930, AFSL 229949) the Responsible Entity of the Australian Ethical Managed Funds. The information is of a general nature and is not intended to provide you with financial advice or take into account your personal objectives, financial situation or needs. Before acting on the information, consider its appropriateness to your circumstances and read the Financial Services Guide, relevant product disclosure statement (PDS) and Target Market Determination (TMD) available on our website. You may wish to seek financial advice from an authorised tax or financial adviser before making an investment decision.
Investing ethically and sustainably means that the investment universe will generally be more limited than non-ethical, non-sustainable portfolios in similar asset classes. This means that the portfolio(s) may not have exposure to specific assets which over or underperform over the investment cycle, and so the returns and volatility of the portfolio(s) may be higher or lower than non-ethical, non-sustainable portfolios over all investment time frames.
*Total returns are calculated using the sell (exit) price, net of management fees and gross of tax as if distributions of income have been reinvested at the actual distribution reinvestment price. The actual returns received by an investor will depend on the timing, buy and exit prices of individual transactions. Return of capital and the performance of your investment in the fund are not guaranteed. Past performance is not a reliable indicator of future performance. Figures showing a period of less than one year have not been adjusted to show an annual total return. Figures for periods of greater than one year are on a per annum compound basis. The current benchmark may not have been the benchmark over all periods shown in the above chart and tables. The calculation of the benchmark performance links the performance of previous benchmarks and the current benchmark over the relevant time periods.
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The information contained in this document is believed to be accurate at the time of compilation.