Fixed Income
The dominant theme in fixed income for the March Quarter was rising yields. Markets that started the quarter pricing a 50/50% chance of an RBA rate hike, by the end of 2026 had fully priced it by the end of January after inflation continued to print persistently above the RBA target band and unemployment remained low. The RBA hiked at the start of February, after forecasting it was going to take longer to return to the target band and this was “not acceptable”. Already poised to do “what it considers necessary” to return inflation to the target band, the Middle East conflict and its escalation throughout March brought an unwelcome rise in the price of oil, and with that, expectations of an additional burst of inflation globally. Market expectations of further monetary response from the RBA shifted higher, with the cash rate priced to increase twice more before year end. Three-year yields peaked 0.69% higher than they started the quarter and then eased back slightly in late March, closing 0.52% higher at 4.65%. Ten-year yields closed 0.25% higher than they started the quarter, at 4.97%.
As a result of the increase in yields, those funds with duration exposures saw declines over the quarter, with the Australian Ethical Altius Bond Fund -0.4% (net of fees) and the Australian Ethical Green & Sustainable Bond Fund -0.4% (net of fees) for the quarter compared to -0.3% for their benchmark, the Bloomberg Ausbond Composite Bond Index. The Short Duration Bond Fund was +0.1% for the quarter, compared to +0.3% for its benchmark.
In credit markets, the uncertainty in March initially drove up to 10 basis points of widening in major bank credit, though this calmed quickly to only a modest 4bps of widening, with single A and BBB rated corporates moving out 5 and 7bps respectively. As a result, the returns on the predominantly floating rate funds were each in line with their benchmarks, with the Australian Ethical Income Fund +0.9% for the quarter, and the Australian Ethical Altius Credit Income Fund +0.9% also, in line with their benchmark the Bloomberg Ausbond Bank Bill Index. Reflecting the tightening in credit that had preceded the most recent quarter, the Credit Income Fund remains +1.2% ahead of its benchmark (net of fees) over the last 12 months.
Looking ahead, markets are watching for whether the high energy costs that have resulted from the Middle East Conflict will continue to flow through into broader inflation, and how persistent this rise will be. This will dictate how much tighter monetary policy needs to be. Against these expectations of higher inflation, the possibility that the energy price shock will lead to a slowing of growth, or stresses jobs growth or credit, clouds the outlook for central bank policy and the degree to which they can look through the initial price impacts.
The duration exposed funds hold a small, long duration position.
Markets are watching for whether the high energy costs that have resulted from the Middle East Conflict will continue to flow through into broader inflation, and how persistent this rise will be.
Fixed Income Funds: Performance vs benchmark*
| Fixed Income (Net of Fees) | Since inception (% p.a.) | 5 years (% p.a.) | 3 years (% p.a.) | 1 year (%) | 3 months (%) |
|---|---|---|---|---|---|
|
Australian Ethical Altius Income Fund (Retail) |
3.5 |
3.1 |
4.5 |
4.0 |
0.9 |
|
Benchmark: Bloomberg AusBond Bank Bill Index1 |
3.9 |
2.9 |
4.1 |
3.8 |
0.9 |
|
Alpha |
-0.3 |
0.2 |
0.4 |
0.2 |
0.0 |
|
Australian Ethical Altius Credit Income Fund (Wholesale) |
3.0 |
3.7 |
5.5 |
5.0 |
0.9 |
|
Benchmark: Bloomberg AusBond Bank Bill Index |
2.2 |
2.9 |
4.1 |
3.8 |
0.9 |
|
Alpha |
0.8 |
0.8 |
1.3 |
1.2 |
0.0 |
|
Australian Ethical Altius Short Duration Bond Fund (Wholesale) |
2.2 |
2.0 |
3.9 |
3.2 |
0.1 |
|
Benchmark: 50% Bloomberg AusBond Composite / 50% RBA Cash Rate |
2.1 |
1.5 |
3.1 |
2.6 |
0.3 |
|
Alpha |
0.1 |
0.5 |
0.8 |
0.6 |
-0.2 |
|
Australian Ethical Altius Bond Fund (Wholesale) |
2.2 |
-0.1 |
1.8 |
1.3 |
-0.4 |
|
Benchmark: Bloomberg AusBond Composite |
2.6 |
0.2 |
2.1 |
1.5 |
-0.3 |
|
Alpha |
-0.4 |
-0.3 |
-0.2 |
-0.2 |
-0.1 |
|
Australian Ethical Altius Green and Sustainable Bond Fund (Wholseale) |
-0.2 |
0.1 |
2.4 |
1.9 |
-0.4 |
|
Benchmark: Bloomberg AusBond Composite |
-0.3 |
0.2 |
2.1 |
1.5 |
-0.3 |
|
Alpha |
0.1 |
0.0 |
0.3 |
0.4 |
-0.1 |
*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.