Fixed Interest Fund
The return of the Australian Ethical Fixed Interest Fund (Retail) (the ‘Fund’) for the quarter ended 31 March 2023 was 4.5% net of fees, 0.1% behind the benchmark’s return of 4.6%. Wholesale units in the Fund delivered a return of 4.5% net of fees.
Bond markets have continued the recent theme of volatility. The Australian 10Y yield closed 2022 at 4.05% in the wake of moves by the Bank of Japan to loosen the tolerance band on their ongoing Yield Curve Control measures that saw global bond yields rise. Over January, it fell to a low of 3.4% (where it had been in early December before the Bank of Japan move) before US Fed Chair Jerome Powell warned markets in early February that “extraordinarily strong” jobs numbers in the US indicated the tightening cycle there would “take a significant period of time” and getting inflation back to target would take leaving rates at a restrictive level “for a period of time”. US yields responded sharply, with the 2Y yield moving from 4.1% to 5.07% through February and into early March, with the US 10Y moving from 3.4% to just under 4%. Similar moves were seen in the long end of the Australian Curve, rising from 3.4% to 3.92%.
These moves were themselves reversed, as yields changed direction in March after the collapse of three US Banks (Signature, Silicon Valley Bank, Silvergate) and the takeover of Credit Suisse by UBS was hastily arranged. Seemingly believing these events and the resulting tightening of credit conditions would be sufficient to end, or at least curtail, central bank appetites to continue raising cash rates to fight inflation, market pricing to the end of 2023 now appears to anticipate rate cuts in the US and a pause from the RBA through 2023 with cuts to follow in 2024. The US 2Y fell from a peak of 5.1% to 4%, and the 10Y fell 0.5% to 3.5%. The Australian 10Y yield sat at 3.3% at the end of the quarter, and all government bonds from 1-15 years are now trading at yields below the current cash rate of 3.6%.
With significant yield declines for the quarter, bond prices rose, driving the strong return for the quarter. The Fund has taken a small short-duration position versus the index in 2Y & 3Y bonds, believing pricing for rate cuts in the near-term is premature, but remains broadly in line with the remainder of the index.
Fixed Interest (Wholesale) Fund Performance
As at 31 March 2023*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 4.5% | 4.6% |
| 1 year p.a. | 0.1% | 0.3% |
| 3 years p.a. | -2.7% | -2.4% |
| 5 years p.a. | 0.9% | 1.3% |
| since inception p.a. | 2.3% | 2.8% |
^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 March 2023*
| fund | benchmark^ | |
|---|---|---|
| 3 months | 4.5% | 4.6% |
| 1 year p.a. | -0.1% | 0.3% |
| 3 years p.a. | -3.0% | -2.4% |
| 5 years p.a. | 0.4% | 1.3% |
| 10 years p.a. | 1.8% | 2.8% |
| since inception p.a. | 2.0% | 2.8% |
^Benchmark: Bloomberg Ausbond Composite Bond Index 0+ Years. Past performance is not a reliable indicator of future performance.
Inception date: 14/06/2012.
With significant yield declines for the quarter, bond prices rose, driving the strong return for the quarter.
Outlook for the Fund
The near-term outlook for yields continues to remain uncertain, with the market oscillating between expectations central bank tightening cycles are near to their conclusion, or even a pivot to loosening, versus inflation prints that continue to run well above target (implying the need to hold rates higher for longer). March 2023 saw yields decline rapidly in response to concerns some flashpoints in the US Banking sectors could precede a larger financial crisis. As that event has moved further into the past, yields have risen again early in April. The Fund will continue to be broadly neutral, but we remain skeptical of prematurely pricing in loosening of monetary policy in the near-term while inflation remains above target, and could take small tactical shorter duration positions when this pricing emerges.
*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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