INVESTMENTS | FUND COMMENTARY
Fixed Interest Fund
The Fixed Interest Fund (Wholesale) (the ‘Fund’) fell 3.91% (net of fees) in the quarter ending 30 June 2022, underperforming its benchmark which fell 3.81%. The Fund fell 10.92% (net of fees) for the 2022 financial year, underperforming its benchmark which fell 10.51%.
25 July 2022
Fund commentary
-
The return of the Fund (Wholesale) for the quarter ended 30 June 2022 was -3.91% (net of fees) while retail units declined -3.96% (net of fees). The fund largely declined in line with its benchmark, the Bloomberg Ausbond Composite Bond Index 0+ Years, which returned -3.81% over the period.
-
The June quarter continued the same themes that were present in the March quarter, with yields rising considerably and credit spreads widening. Markets have moved to price an aggressive response from central banks to high rates of inflation, with expectations they will need to go beyond normalisation of monetary policy to pre-pandemic settings and target policy that seeks to restrict activity.
-
Government bond yields increased a further 77bps over the quarter, with the 10-year bond yield increasing to 3.57%, having increased 1.11% in the March quarter. In June, the 10-year yield reached a peak above 4.1% mid-month, before easing back as market fears about a possible recession began to emerge.
-
The yield to maturity of the Fund sits at 3.55% at the end of June 2022, in line with the benchmark yield at 3.56%, having started the year more than 2% lower at 1.46%.
-
The return of the Fund (Wholesale) for the year ended 30 June 2022 was –10.92% (net of fees) and -10.66 (gross of fees). The Fund’s benchmark, the Bloomberg Ausbond Composite Bond Index 0+ Years, returned –10.51%.
-
The last 12 months have seen a significant paradigm shift in bond markets. At the end of June 2021, yields were at low levels in a post-pandemic environment, supported by multiple monetary policy tools in the form of historically low official cash rates, bond buying programs, and yield curve control measures. At first, it was anticipated that the exit from these policies would be gradual.
-
With inflation showing signs of rising in late 2021, yield curve control measures - which had informed views of when the Reserve Bank was expected to begin raising the official cash rate - were abandoned. Central banks, which initially dismissed inflation as transitory and tied to Covid-related supply chain disruptions, were forced to respond as it proved more persistent. Economies reopened with tight labour markets and ongoing supply chain disruptions that accelerated further with the outbreak of war in Ukraine. Bond buying programs have been replaced with tightening cash rates and promises that central banks will do what is required to return surging inflation back to the target band, including taking the cash rate beyond neutral and into restrictive territory.
-
The bond market response to this has seen the yield on the benchmark increase by 2.5% over the last 12 months: from 1.05% at the end of June 2021 to 3.55% at the end of June 2022. As bond yields rise their price falls, resulting in short-term capital losses for bond investors.
The last 12 months has seen an about-face in monetary policy, with central banks pivoting from highly accommodative settings, utilising extraordinary policy tools, to outright hawkish and hiking cash rates as inflation proved more persistent than anticipated. This has seen a significant rise in yields and a challenging environment for bond portfolios.
Yields pulled back from mid-June, when the Australian 10yr traded briefly above the 4% level. This was due to concerns central banks would not be able to engineer a benign outcome in their responses to inflation, and markets began to consider the potential for a recession.
Outlook for the Fund
The Fund seeks to deliver a return that is in line with its benchmark, the Bloomberg Ausbond Composite Bond Index 0+ Years. The Fund is currently positioned with a neutral duration relative to this benchmark, with aggregate government bond and credit allocations at benchmark weights to deliver the risk-return characteristics of this benchmark within an ethically screened investment universe.
With Central Bank’s highly active, market volatility is expected to continue in response to economic data releases, particularly the monthly inflation reads in the US. While some commodity prices have recently declined from their highs, this has not yet been visible in inflation data and inflation to date has persisted well above target.
With this backdrop, markets can be expected to continue to oscillate between anticipating further central bank responses to the data and pushing yields higher, while then anticipating a slowdown or possible recession in the economy, necessitating a loosening in monetary policy.
Fixed Interest (Wholesale) Fund Performance
As at 30 June 2022*
| fund | benchmark | |
|---|---|---|
| 3 months | -3.9% | -3.8% |
| 1 year p.a. | -10.9% | -10.5% |
| 3 years p.a. | -3.0% | -2.6% |
| 5 years p.a. | 0.4% | 0.9% |
| since inception p.a. | 2.0% | 2.5% |
*Benchmark: Bloomberg Ausbond Composite Bond Index 0+ Years. Past performance is not a reliable indicator of future performance.
Inception date: 14/06/2012.
Fixed Interest (Retail) Fund Performance
As at 30 June 2022*
| fund | benchmark | |
|---|---|---|
| 3 months | -4.0% | -3.8% |
| 1 year p.a. | -11.1% | -10.5% |
| 3 years p.a. | -3.3% | -2.6% |
| 5 years p.a. | -0.1% | 0.9% |
| 10 years p.a. | 1.7% | 2.6% |
| since inception p.a. | 1.8% | 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.
With Central Bank’s highly active, market volatility is expected to continue in response to economic data releases, particularly the monthly inflation reads in the US.
Fund strategy
Australian Ethical offers investors the opportunity to invest in a diversified portfolio of interest-bearing investments generating income. The Fixed Interest Fund is invested in primarily fixed rate bonds, from issuers such as the Commonwealth and State Governments, banks and other corporate issuers that meet the Australian Ethical Charter. The Fund aims to match the return of the UBS composite bond index.
*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.