Fixed Interest Fund
The Fixed Interest Fund (Wholesale) (the ‘Fund’) rose 4.73% net of fees in the 12 months ended 31 December 2023, underperforming its benchmark which rose 5.06%. Gross fund performance was 5.04%.
2023 was a volatile year for Fixed Income. While the Australian 10y yield ended the year at 3.95%, only 0.10% below its starting point, it traded within a 180bps range. In March, as US regional Banking issues US Regional Banking issues led the market to price a premature end to the central bank tightening cycle, it troughed at 3.18%, before peaking as high as 4.95% in early November.
Since this peak, in the last two months of the year the yield declined some 1%, erasing what had been a negative return for the calendar year to date (-0.68%, gross of fees for the fund) and delivering the tailwind that drove returns into positive territory. This remarkable decline followed forecasts and commentary from the US Fed that confirmed they would be easing policy in 2024.
Markets proceeded to price in further easing, and ended the year expecting a significant retreat in monetary policy lay ahead.
Fixed Interest (Wholesale) Fund Performance
As at 31 December 2023~
| fund | benchmark^ | |
|---|---|---|
| 3 months | 3.7 | 3.8 |
| 1 year p.a. | 4.7 | 5.1 |
| 3 years p.a. | -3.0 | -2.7 |
| 5 years p.a. | 0.3 | 0.6 |
| since inception p.a. | 2.2 | 2.6 |
^ Benchmark: Bloomberg Ausbond Composite Bond Index 0+ Years. Past performance is not a reliable indicator of future performance.
Inception date: 15/01/2014.
Fixed Interest (Retail) Fund Performance
As at 31 December 2023~
| fund | benchmark^ | |
|---|---|---|
| 3 months | 3.6 | 3.8 |
| 1 year p.a. | 4.5 | 5.1 |
| 3 years p.a. | -3.2 | -2.7 |
| 5 years p.a. | -0.1 | 0.6 |
| 10 years p.a. | 1.5 | 2.6 |
| since inception p.a. | 1.9 | 2.6 |
^ Benchmark: Bloomberg Ausbond Composite Bond Index 0+ Years. Past performance is not a reliable indicator of future performance.
Inception date: 14/06/2012.
The remarkable decline in the Australian 10 year yield followed forecasts and commentary confirming the US Fed would be easing policy in 2024.
Portfolio changes
The Australian Ethical Fixed Interest Fund remains an ethically screened, benchmark aware fund.
The fund participates in the issuance of new Commonwealth and State Government Bonds where these instruments will become a part of the index, maturity of these instruments will regularly see investments leave the fund as a matter of course.
The fund aims to hold its duration (a measure of the sensitivity to changes in yield) at close to that of the benchmark index. At the end of December, the fund held the same duration exposure as the benchmark.
The fund has a small overweight allocation to credit exposures, seeking to capture additional spread for credit over government bonds, but only in near term maturities with credit pricing as though 2024 will not experience a recession.
We believe that for market pricing to be validated, inflation outcomes need to continue to decline steadily.
Sector allocation
Sector overweights
Credit, Semi Government, Cash
Sector underweights
SSA, Treasury
Outlook for the Fund
The Fund remains neutral duration, with modified duration at 5.1 vs the index at 5.1, and the yield to maturity at 3.9%. The RBA is priced to cut twice in 2024, in August and November after quarterly CPI releases.
We believe that for market pricing to be validated, inflation outcomes need to continue to decline steadily. The risk to fixed income returns in early 2024 lies in inflation – particularly services inflation – remaining persistent. Similarly, unemployment remaining below RBA forecasts would suggest an ongoing tight labour market which could feed back into inflation. As a result we are biased to move short duration should further loosening of monetary policy become priced in.
See Fund info
This is general information only and is not intended to provide you with financial advice or take into account your individual investment objectives, financial situation or needs. You should obtain and consider the relevant Financial Services Guide, Product Disclosure Statement and Target Market Determination relating to this product before making a decision
*Total returns are calculated using the sell (exit) price, net of management fees, transaction costs and performance fees where applicable and are calculated based on distributions being reinvested. The actual returns received by an investor will depend on the timing of the buy and exit prices of individual transactions. Distributions 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.
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 Fund may not have exposure to specific assets which over or underperform over the investment cycle, and so the returns and volatility of the Fund may be higher or lower than non-ethical, non-sustainable portfolios over all investment time frames.
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.