Perpetual Wholesale Dynamic Fixed Income (PER0557AU) Report & Performance

The Fund’s running income was the most substantial contributor to relative return over the month. The Fund’s floating rate exposures have benefitted from rising base rates over recent periods, contributing to the improved running yield. The portfolio running yield at month end was 4.6%.

Interest rate dynamics were positive for performance during the month. Short term yields rallied following the RBA’s decision to keep rates on hold while long term yields sold off marginally. The Fund’s exposure to the very short end was rewarded while longer dated fixed rates exposures detracted slightly as the yield curve steepened. The Fund’s exposure to the short The Fund’s duration remains in line with the strategic target duration of 2-2.5 years.

Credit spread tightening contributed to return during July. Domestic spreads narrowed over the month on supportive supply dynamics and increasing investor risk appetites. The Fund’s domestic bank exposures were the most substantial contributor to credit spread return during the month Subordinated bank exposures performed well as tier 2 and hybrid paper tightened reflecting elevated secondary market demand and a paucity of new issues. Elsewhere, non-financial corporates and utilities were constructive.

While the outlook for credit has improved, the Manager remains conscious of the challenging macro environment and the risks associated with tightening financial conditions. The Fund will continue to actively manage duration and credit exposures to mitigate risks while taking advantage of relative value opportunities presented as the outlook improves.

The Fund’s positive net return was notable in a month where domestic yields rose sharply along the curve. The Fund’s active duration management and relatively short strategic target duration, diversified exposure to floating rate credit and robust running yield combined to mitigate the impact of yield volatility.

The Fund’s running income was the most substantial contributor to relative return, offsetting the impact of rising bond yields. The running yield has improved substantially over the past 12 months, driven by the Fund’s floating rate exposures which benefitted from 400bps of rate rises since May 2022. The portfolio running yield at month end was 4.7%.

Rising bond yields detracted from return during the month. Domestic yield rose sharply as investors priced in further RBA rate increases, while the curve flattened further, inverting at the 3 and 10-year tenors for the first time since the GFC. The Fund began the month with just 0.6 years of duration, short of the strategic target range of 2-2.5 years. This positioning mitigated the impact of rising bond yields following the RBA’s decision to increase the target cash rate at their June meeting, a decision that defied consensus expectations. As bond yields sold off, the Manager elected to lengthen the Fund’s duration, adding back 1.7 years to be in line with the strategic target range by month end.

Credit spread dynamics were constructive during June as domestic credit spreads narrowed on aggregate while remaining in range of recent levels. The Fund benefitted from exposure to foreign denominated domestic bank hybrids which recovered following the dramatic selloff observed in March. Elsewhere, credit spread performance was broad based with spreads contracting across the portfolio’s exposure to utilities, infrastructure, mining, energy and telecommunications. Narrowing semi-government spreads also contributed substantially.

In line with the challenging outlook for credit, the Manager remains cognisant of risks and the Fund remains defensively positioned. The fund will continue to actively manage duration and credit exposures to mitigate risks while taking advantage of relative value opportunities.

The Fund’s running income was a substantial positive contributor to relative return, partially offsetting the impact of rising bond yields. Domestic and offshore banks alongside RMBS were the key drivers of income return with non-financial corporate exposures also contributing. The income generated by the Fund’s floating rate credit exposures continues to benefit from rising interest rates. The portfolio running yield at month end was 4.5%.

Rising bond yields were the most significant determinant of return during the month. Domestic yield moved higher over the month following the RBA’s decision to increase rates at their May meeting in anticipation of further tightening. Facing persistently elevated core inflation and a backdrop of slowing global growth, the path of monetary policy tightening is uncertain, and risk of policy errors remains elevated. In such conditions, the Fund’s relatively short target duration continues to limit downside risks and mitigate the impact of month-to-month yield volatility. During the month, the manager elected to reduce the Fund’s duration in line with the worsening Tactical Asset Allocation Bond Score. At month end, the Fund’s modified duration was 0.6 years.

Credit spread dynamics were marginally negative for performance during May as spreads traded in range of recent levels. The Fund’s semigovernment and securitised exposures contributed to credit spread return while longer dated domestic bank paper and real estate investment trusts detracted slightly. Following a substantial de-risking of the portfolio over recent months credit risk was marginally increased during the month as the outlook improved.

In line with the challenging outlook for credit, the Manager remains cognisant of risks and selective in purchases made. Fund remains defensively positioned while retaining the capacity to take advantage of relative value opportunities presented by recent volatility.

During a month where fixed rate bonds sold off, the combination of the Fund’s robust running income and the contribution of credit and swap spread tightening fully offset the impact of rising bond yields. Income return was the most significant contributing factor to performance with the Portfolio collecting robust running income across all sectors. Allocations to non-financial corporates, domestic banks and RMBS were the most substantial contributors to income return. The portfolio running yield at month end was 3.9%.

Credit spread dynamics were constructive for performance during the month as spreads tightened on aggregate. The Fund’s allocation to financials – most notably domestic and offshore banks – were the key contributors to spread return during February. Over the month, the Fund’s credit risk was actively managed with A and BBB rated exposures being reduced while allocation to AAA rated credit was increased.

Interest rate dynamics detracted from returns over the month as bond yields rose on anticipation of an extended monetary policy tightening cycle and rising terminal rate expectations. The Fund’s relatively short strategic target duration of 2-years continues to minimise the impact of yield curve volatility. Throughout the last 12 months of rising interest rates, the Fund’s relatively short strategic duration has been effective in limiting the impact of the dramatic rise in bond yields, contributing to the limited drawdown and short expected time to recover. Curve positioning was also constructive during February as the Fund’s limited exposure to very short end yields mitigated the impact of curve flattening as the short end sold off sharply.

Alongside the strategic target duration, portfolio duration is managed in line with signalling from Perpetual’s proprietary tactical asset allocation model. The model is used to determine valuation, economic cycle and technical indicators. The combined score began the month in positive territory before declining on the back of degrading valuation and technical indicators. At month end, Fund duration was in line with the strategic target of 2- years. The Fund remains defensively positioned while retaining the capacity to add risk should the outlook for credit improve.

Income return remains a significant contributing factor to performance with the Portfolio collecting robust running income across all sectors. Allocations to non-financial corporates, domestic banks and RMBS were the most significant contributors to income return. The portfolio running yield at month end was 3.90%. Credit spread tightening was a substantial contributor to performance over the month. In a strong month for credit, spreads narrowed as the outlook for global growth improved while investors also priced in a slower pace of monetary tightening from central banks.

The key contributing sectors to credit spread outperformance were domestic and offshore banks, non-financial corporates and utilities. The Fund’s exposure to USD and EUR denominated debt performed well across a number of sectors including domestic banks, infrastructure and utilities. While the Fund retains the capability to invest in offshore credit markets, all foreign denominated exposures are hedged back to AUD. As the credit outlook improves, the Manager is comfortable with the current credit exposure of the fund and its capacity to take advantage of upcoming opportunities. Interest rate dynamics were the most significant contributor to absolute return during the month as domestic yields fell sharply on moderating inflation data.

Duration positioning was actively managed throughout the month with the manager electing to shorten duration, selling into strength as yields rallied. At month end, the Fund was in line with the strategic target duration of 2 years. Throughout the last 12 months of rising interest rates, the Fund’s relatively short strategic duration has been effective in limiting the impact of the dramatic rise in bond yields, contributing to the limited drawdown and short expected time to recover. Alongside the strategic target duration, portfolio duration is managed in line with signalling from Perpetual’s proprietary tactical asset allocation model.

The model is used to determine valuation, economic cycle and technical indicators. The combined score improved over the month, reflecting strengthening valuation indicators. The Fund remains defensively positioned while retaining the capacity to add risk as the outlook for credit continues to improve

Income return was a significant contributor factor to performance during the month with the Portfolio collecting robust running income across all sectors. Allocations to non-financial corporates, domestic banks and RMBS were the most significant contributors to income return. Over the past year, rising interest rates and expanding credit premia have contributed to increases in portfolio income. The portfolio running yield at month end was 4.0%. Credit spread dynamics contributed to performance during December. Credit spreads traded in a tight range, narrowing over the course of the month. Credit spread performance was led by domestic and offshore banks with corporates and utilities also contributing.

The Portfolio’s exposure to USD denominated domestic bank debt performed well, led by Macquarie and Westpac USD hybrids. Rising bond yields was the key determinant of the Fund’s negative absolute return during the month. Bond yields rose sharply over the final weeks of the year giving back a substantial portion of their gains since October. The impact of rising long term yields was mitigated by the fund’s relatively short strategic target duration.

Throughout 2022, the Fund’s relatively short strategic duration has been effective in limiting the impact of the dramatic rise in bond yields, contributing to the limited drawdown and short expected time to recover. Portfolio duration is managed in line with signalling from Perpetual’s proprietary tactical asset allocation model. The model is used to determine valuation, economic cycle and technical indicators. The combined score remained in marginally negative territory throughout the month. The Fund’s duration increased slightly over the course of the month ending December marginally above 2 years. Despite recent improvements in the credit outlook the manager remains cognisant of risks and selective in purchases made. The Fund remains defensively positioned while retaining the capacity to add risk as the outlook for credit continues to improve.