Fixed Interest Fund
The Australian Ethical Fixed Interest Fund gross return for the 12 months ended 30 June 2024 was +3.71%, 3 basis points ahead of the 3.68% return of the fund benchmark, the Bloomberg Ausbond Composite Bond Index 0+. After fees, retail units returned 3.18% and wholesale units returned 3.39%.
The last financial year has been punctuated by volatility in bond yields. Markets have oscillated between pricing additional tightening by central banks in order to contain expectation through the first half of the year, before pricing in forward expectations of rate cuts early in 2024, then pushing those expectations back as the economic data has failed to support early moves to unwind the tightening cycle that was designed to contain post pandemic inflation.
The yield on Australian Government 10 year bonds rose 0.40% across the year from 4.02%% to 4.42%, a high of 4.95% in November following a final tightening move from the RBA in November and the peak of “higher for longer” expectations. Since falling to 3.89% in late December, this longer bond yield traded in a band around 4.1% through January to March, then a higher band around 4.3% through April-June. The fund has taken small long duration positions to capture the higher side of this band, but we remain cautious with domestic inflation data surprising to the upside late in the year.
The fund has an small overweight to credit (just under +5% vs benchmark), focused on front end credit opportunities only, with credit markets priced for a benign economic outlook rather than pricing in recessionary conditions seeing longer credit spreads trading lower than we would expect for this point in the cycle.
Fixed Interest (Wholesale) Fund Performance
As at 30 June 2024*
| fund | benchmark^ | |
|---|---|---|
| 3 months | -0.87% | -0.84% |
| 6 months | -0.08% | 0.18% |
| 1 year p.a. | 3.39% | 3.68% |
| 3 years p.a. | -2.37% | -2.06% |
| 5 years p.a. | -0.93% | -0.60% |
| since inception p.a. | 2.07% | 2.53% |
^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 30 June 2024*
| fund | benchmark^ | |
|---|---|---|
| 3 months | -0.92% | -0.84% |
| 6 months | -0.02% | 0.18% |
| 1 year p.a. | 3.18% | 3.68% |
| 3 years p.a. | -2.56% | -2.06% |
| 5 years p.a. | -1.22% | -0.60% |
| since inception p.a. | 1.80% | 2.53% |
^Benchmark: Bloomberg Ausbond Composite Bond Index 0+ Years. Past performance is not a reliable indicator of future performance..
Inception date: 14/06/2012.
Portfolio Changes
Additions to the Fund
-
Modified Duration – Neutral at end of June, but had been +0.05 long vs benchmark through April to June anticipating longer bond yields to moderate. Exited mid June.
-
Semi Government Allocation – Semi Government allocation was+2.4% relative to index, funded from Commonwealth Government Securities, focused on securities with 5-7 years to maturity for ~40bps pickup in yield
-
Credit Allocation – Credit allocation was +4.8% relative to index, funded from Commonwealth Government Securities, focused on securities with <3y to maturity.
The last financial year has been punctuated by volatility in bond yields.
Sector allocation
Sector overweights
Semi-Government +2.41%, Credit +4.76%, Cash +0.16%
Sector underweights
SSA -0.20%, Commonwealth Government -7.16%
Outlook for the Fund
The fund commences the new financial year with a neutral duration position. The recent monthly inflation data has printed ahead of expectations, and the August meeting of the RBA remains live for an interest rate hike should the quarterly print validate the monthly outcomes and also print higher than expected. Unemployment data has remained volatile.
The fund will continue to take small long duration positions should yields spike considerably, as the hurdle to further rate hikes remains high and we do not anticipate a near term move from the RBA to signal the start of a new hiking cycle that would see yields push higher, instead believing it would serve as an “insurance hike” to ensure inflation remains on the forecast path back to the 2-3% inflation band by 2026.
*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.
Disclaimer
Interests in the 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 in this summary 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 and Target Market Determination available on our website.
You may wish to seek financial advice from an authorised tax or financial adviser before making an investment decision. Past performance is not a reliable indicator of future performance.
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