Fixed Income
Australian bonds declined alongside global bond markets over the quarter. Persistent inflation, elevated energy prices and expectations that interest rates would remain higher for longer pushed bond yields higher and prices lower. The Reserve Bank of Australia (RBA) raised the cash rate by 0.5 percentage points over the quarter in response to renewed inflation concerns, while noting that unemployment had edged up to 4.4%.
Credit markets held up relatively well through July and August, despite a record volume of new bonds being issued. Investor demand for high-quality corporate bonds remained strong, including for Alphabet’s $4.75 billion transaction – the largest corporate bond deal completed in the Australian dollar market. Sentiment weakened in September as rising global bond yields and persistent inflation concerns weighed on the market. Credit spreads rose modestly, with five-year major-bank spreads rising from 0.64% in July to 0.70% by quarter end. Credit spreads of industrial companies (non-financial businesses), increased slightly from 1.00% to 1.02%.
The Australian Ethical Altius Bond Fund and the Green & Sustainable Bond Fund both returned -1.7% and underperformed the Bloomberg AusBond Composite Bond Index (-1.5%). The funds held more duration exposure than the benchmark, making them slightly more sensitive to the rise in yields. The Short Duration Bond Fund returned -0.3% compared with -0.2% for its benchmark, with its interest-rate positioning also detracting from relative performance.
The Credit Income Fund outperformed its benchmark (the Bloomberg AusBond Bank Bill Index), returning 1.3% compared with 1.1%. Income from the fund’s corporate bond holdings supported performance, while demand for high-quality credit remained resilient.
A new investment for the Green & Sustainable Bond Fund during the quarter was a FleetPartners 2025 asset-backed security, supported by a pool of vehicle-finance payments. FleetPartners is a vehicle leasing and fleet-management provider that helps customers reduce fleet emissions through fleet optimisation, improved fuel efficiency and the transition to electric vehicles. The money raised through the transaction is used entirely to finance battery electric vehicles. The investment is certified under the Climate Bonds Standard and meets its criteria for low-carbon transport. From an ethical perspective, it directly supports the shift to lower-emission transport. From an investment perspective, it provides exposure to the long-term growth of electric transport through a security backed by a diversified pool of vehicle-finance payments, with a clearly defined and independently certified use of proceeds.
The inflation outlook remains finely balanced. Higher oil and energy prices could place renewed upward pressure on consumer prices, and markets currently expect the cash rate to rise from 4.60% to a peak of around 4.88% by May 2027. At the same time, some domestic inflation pressures are moderating: housing inflation remains elevated but monthly increases have slowed, while rental inflation has eased.
We therefore remain cautious about inflation and interest-rate risk in the near term. However, the rise in yields has improved prospective returns from bonds. Long-term yields already reflect a demanding outlook, real yields are at multi-decade highs, and this is creating increasingly attractive opportunities in longer-dated bonds. In credit, we continue to favour high-quality issuers while remaining alert to refinancing pressure among lower-rated borrowers.
A new investment for the Green & Sustainable Bond Fund during the quarter was a FleetPartners 2025 asset-backed security, supported by a pool of vehicle-finance payments. The money raised through the transaction is used entirely to finance battery electric vehicles.
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 Cash Fund | 3.6 | 3.5 | 4.6 | 4.1 | 1.1 |
| Bloomberg AusBond Bank Bill | 3.9 | 3.3 | 4.2 | 4.1 | 1.1 |
| Alpha | -0.3 | 0.2 | 0.4 | -0.0 | -0.0 |
| Australian Ethical Altius Credit Income Fund (Ordinary) | 3.1 | 4.1 | 5.5 | 4.8 | 1.3 |
| Bloomberg AusBond Bank Bill | 2.3 | 3.3 | 4.2 | 4.1 | 1.1 |
| Alpha | 0.8 | 0.8 | 1.2 | 0.7 | 0.2 |
| Australian Ethical Altius Short Duration Bond Fund (Ordinary) | 2.2 | 2.3 | 4.6 | 1.9 | -0.3 |
| Bloomberg AusBond Composite / RBA Cash Rate Target | 2.2 | 1.7 | 3.9 | 1.8 | -0.2 |
| Alpha | 0.1 | 0.6 | 0.7 | 0.1 | -0.1 |
| Australian Ethical Altius Bond Fund (Wholesale) | 2.2 | -0.3 | 3.3 | -0.7 | -1.7 |
| Bloomberg AusBond Composite | 2.6 | 0.0 | 3.6 | -0.4 | -1.5 |
| Alpha | -0.4 | -0.3 | -0.2 | -0.3 | -0.2 |
| Australian Ethical Altius Green and Sustainable Bond Fund (Ordinary) | 0.0 | 0.0 | 3.9 | -0.4 | -1.7 |
| Bloomberg AusBond Composite | -0.1 | 0.0 | 3.6 | -0.4 | -1.5 |
| Alpha | 0.1 | 0.0 | 0.3 | 0.0 | -0.2 |
*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.
Our investment restrictions include thresholds and other tolerances that vary depending on the investment. We apply both qualitative and quantitative analysis when making investment decisions and may invest where we believe the positive aspects outweigh the negative. From time to time, we may use derivatives that provide temporary exposure to a broad market index, such as the S&P/ASX 200. This does not involve direct investment in, or ownership of, the underlying companies. For more information, please read our Ethical Guide.
*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.
This commentary may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, Australian Ethical accepts no responsibility for the accuracy or completeness of, nor does it endorse any such third party material. To the maximum extent permitted by law, we intend by this notice to exclude liability for this third party material.
The information contained in this document is believed to be accurate at the time of compilation.