Fixed Income funds
Fixed Income had a strong quarter with 3-year yields finishing lower at 3.69% and 10-year yields unchanged at 4.42%. Credit spreads performed well with bank and corporate margins tighter compared to the start of the year. Credit remained well supported over the quarter with new transactions being oversubscribed.
The March quarter saw Central Bank policy divergence across countries. The RBA cut the cash rate in February, the first cash rate move since November 2023. The US Federal Reserve, driven by inflation and economic uncertainty, held interest rates steady. The ECB cut rates by 0.25% in January and March while the Bank of Japan raised rates again as they move to normalize interest rate policy.
The Federal Budget landed in March, along with an announcement of a May 3 Federal Election date. This had a minimal impact on interest rates.
Trump’s tariff uncertainty increased through the March quarter, reaching a crescendo on April 2 when more detail was added to America’s protectionist-leaning plans. This led to heightened interest rate volatility throughout the quarter. April 2 and 3 saw short-dated interest rates fall sharply while long-dated interest rates rose, a phenomenon rarely seen.
The Bloomberg Ausbond Credit Index (+1.52%) outperformed the Treasury Index (+1.16%) during the quarter. This is good for our Fixed Income products with credit exposures, like the Australian Ethical Income Fund, the Altius Short Term Income Fund, and the Altius Sustainable Bond Fund.
As fixed income investors we believe rising uncertainty could cool economic activity. As a result, funds such as the Altius Sustainable Bond Fund, the Australian Ethical Fixed Interest Fund, and the Altius Green Bond Fund added to their duration positions.
Outlook
Tariffs are expected to weaken growth, which is how it seems to be playing out. We have moved from the pre-announcement speculation to post announcement reactions and retaliations, with some countries reciprocating with their own trade conditions.
The US Federal Reserve is likely to remain paused near term, needing to assess the inflationary impact and “to make certain that a one-time increase in the price level does not become an ongoing inflation problem”. Clarity could take some months.
Australian inflation has very gradually been falling back to target for domestic reasons – led by slowing rents, other housing inputs and wage pressures. Lower oil prices also helped too, which also helped economic growth, including increasing a supply of goods into Australia after being rerouted from the United States. The RBA should have greater confidence that inflation is moving towards its target, which could result in a faster pace of rate cuts.
Looking back, inflation during Trump’s last term as US President was minimal, confined to the US and largely the result of income and company tax cuts. We expect the same to be the case this term too. Outside the US, oil prices have fallen substantially, providing a stable global disinflationary pulse.
The inflation experience of the first Trump administration’s tariffs was a minimal: what inflation there was in 2017 to 2019 was confined to the US, and largely the result of income and company tax cuts. We expect this to be the case this time also. Outside the US there is the potential of rerouted supply to push prices down, and oil prices have fallen substantially, providing a global disinflationary pulse.
We remain watchful and active, particularly as the portfolio strategy is to actively manage duration settings.
We are incrementally increasing our long bond exposures. We expect the range on Australian long dated bonds to oscillate around a midpoint, with the 10-year Australian sovereign bonds offering around 4.0% over the medium term. We keep in mind the increasing likelihood that yields could move substantially lower in the event of trade war inspired recession.
While we are incrementally increasing our long bond exposures, we keep in mind the increasing likelihood that yields could move substantially lower in the event of trade war inspired recession.
Fixed Income Funds: Performance vs benchmark*
| Fund | Since inception (% p.a.) | 5 years (% p.a.) | 3 years (% p.a.) | 1 year (%) | 3 months (%) |
|---|---|---|---|---|---|
|
Australian Ethical Income Fund
|
2.2
|
2.4
|
3.9
|
5.0
|
1.2
|
|
Altius Sustainable Short Term Income Fund
|
2.7
|
3.1
|
4.6
|
5.7
|
1.3
|
|
Altius Sustainable Bond Fund
|
2.0
|
1.2
|
3.3
|
4.5
|
1.3
|
|
Australian Ethical Fixed Interest Fund
|
2.3
|
-0.8
|
1.5
|
3.1
|
1.3
|
|
Altius Green Bond Fund
|
-0.6
|
N/A
|
1.8
|
3.5
|
1.4
|
*All returns are net of fees for the Wholesale option. Find more information on these funds via the managed funds page including Retail performance.
^ Benchmark: SAA Weighted Index. Past performance is not a reliable indicator of future performance.
1 Benchmark changed from Australian 90 Day Bank Bill to Bloomberg AusBond Bank Bill Index from 13 Aug 2019. The historical benchmark returns are calculated by linking indices.
*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.
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.
The information contained in this document is believed to be accurate at the time of compilation.