Advance Int Fix Intr Multi-Blend W (ADV0067AU) Report & Performance

Global bond markets generated a negative return over June with the Barclays Capital Global Aggregate Bond Index (Hedged) returning -0.2% and the FTSE World Government Bond (ex-Australia) Index (Hedged) returning -0.3%. Most ten-year bond yields moved higher over the month, increasing in the UK (20bps to 4.38%), the US (16bps to 3.81%), and Germany (14bps to 2.41%), while decreasing in Japan (-3bps to 0.40%). Two-year bond yields mostly moved higher over the month, increasing in the UK (93bps to 5.26%), the US (40bps to 4.94%) and Germany (49bps to 3.19%), while decreasing in Japan (-2bps to -0.08%). Returns for most Australian bondholders were negative over June as 10-year bond yields (42bps to 4.03%), five-year bond yields (58bps to 3.95%) and two-year bond yields (64bps to 4.20%) increased.

In April, risk asset returns in developed markets were mostly positive, while defensive assets also provided modest gains. Emerging market equities were lower than their developed market counterparts due to the weakness in Chinese stocks.

News flow during April was fairly quiet until the last week of the month when banking concerns resurfaced, as First Republic Bank came under pressure and was ultimately acquired by J.P. Morgan. Equity market volatility ended the month at its lowest level since late-2021, despite a brief spike during the last week of the month. Major economies remained resilient, driven largely by service activity. US GDP for Q1 2023 rose at a 1.1% annualised rate, which was below expectations.

Consumer confidence remained on the rise and labour markets remained tight, in spite of high profile layoffs in the US. Headline inflation continued to decline in major economies, reaching 5.0% in the US, its lowest level since mid-2021. In the UK, inflation fell by less than expected and remained above 10.0%, the highest rate in major developed economies. The People’s Bank of China and Reserve Bank of Australia left key lending rates unchanged. Over April, Hedged Developed Markets Overseas Shares returned 1.6%. Even though the US earnings season delivered a fair number of positive EPS surprises relative to expectations, the earnings decline over the first quarter is set to be the largest since the second quarter of 2020. Returns were positive for most sectors with Consumer Staples delivering the largest gains for the month. Value outperformed growth among large- and mid-cap stocks, while growth outperformed among small-caps. Emerging Market Shares (UH) underperformed unhedged Overseas Shares in April. Weakness in China outweighed the better performance from India and Brazil. Hedged Overseas Government Bonds returned 0.2% over the month as bond yields generally saw modest changes for most countries during the month. In the US, the 10-year bond yield fell by 4bps, while the 30-year yield was flat. In developed markets outside the US, 10-year yields rose by 6bps for Japan and 23bps for the UK. US inflation expectations, as measured by the 10-year inflation breakeven rate, fell from 2.3% to 2.2%.

Australian Government Bonds were flat over the month. Lending conditions remain somewhat stressed due to banking concerns but bond markets have remained fairly calm. Credit spreads generally declined during the month, with investment-grade spreads falling 2bps and high yield spreads declining 3bps. Australian Shares returned 1.8%, underperforming their overseas counterparts in April. Real Estate (5.2%) and IT (4.5%) were the strongest sectors, meanwhile Materials (-2.6%) and Utilities (1.4%) were the largest detractors.

Global bond markets generated a positive return over April with the Barclays Capital Global Aggregate Bond Index (Hedged) returning 0.4% and the FTSE World Government Bond (ex-Australia) Index (Hedged) returning 0.2%. Most ten-year bond yields moved slightly higher over the month, increasing in the UK (23bps to 3.72%), Germany (2bps to 2.32%), and Japan (3bps to 0.36%), while decreasing in the US (-5bps to 3.43%). Most two-year bond yields also rose over the month, increasing in the UK (34bps to 3.78%) and Germany (5bps to 2.79%) while decreasing in the US (- 5bps to 4.09%) and remaining unchanged in Japan at -0.05%. Returns for most Australian bondholders were marginally positive over April despite 10-year bond yields increasing (4bps to 3.34%), five-year bond yields (4bps to 3.07%) and two-year bond yields remaining unchanged at 3.08%.

The Advance International Fixed Interest Multi Blend Fund underperformed the benchmark by 32bps during the month of March. Relative manager performance was mixed over the month, with Western outperforming the benchmark, whilst Wellington, PIMCO and Standish delivered negative excess returns. Standish delivered negative excess returns relative to the benchmark over the month.

The bulk of the period’s relative underperformance can be attributed to the underweight positions across developed market rates, and credit allocation overweights to Financials, Banks, and REITS as the collapse of two regional banks and as banking sector concerns put upward pressure on financials related spreads. PIMCO underperformed the benchmark with the contributors being the overweight positions to Australian, Korean and Singaporean duration (as yields rallied), while the detractors largely stem from underweight positions across US and European duration added with overweight positons across non-agency mortgages. Wellington underperformed the benchmark over the month as the macro strategies detracted.

Duration, country, currency and yield curve strategies all contributed to the underperformance. Western delivered a positive excess return in March. Duration and yield-curve positioning had a positive impact on the performance as yields fell over the month. An underweight to the US dollar added to the return as well. An overweight to European financials detracted as spreads widened sharply. It was another volatile month for the financial markets in March.

Government bond yields declined significantly over the month, largely due to bank failures in the US and the rescue takeover of Credit Suisse leading to concerns about financial stability. Inflation continued to show signs of moderating in many parts of the world but remains the key concern for most developed market central banks. Economic activity has tended to soften, and major central banks increased interest rates once more, but the rhetoric surrounding those decisions became less hawkish.

The Advance International Fixed Interest Multi Blend Fund underperformed the benchmark by 7bps during the month of February. Relative manager performance was negative over the month, with Wellington, PIMCO and Standish all outperforming the benchmark, whilst WAM delivered negative excess return. Standish delivered a positive excess return, with most of the alpha attributable to active positioning in developed rates markets. In spread sectors, active intra-sector positioning supported relative returns as overweights in ABS and REITs outperformed. PIMCO delivered performance that was in line with the benchmark.

The fund’s positioning to US and European duration (as yields fell across the curve) added to relative returns, while an overweight towards Australian duration detracted as yields rose. Wellington underperformed the benchmark over the month. While the duration strategy contributed, country, currency and yield curve strategies were detracted. Western underperformed the benchmark over the month. An overweight duration in the US, core European and UK detracted as global government bond yields rose. An overweight to corporate bonds and the currency positioning detracted as well. The fixed income markets traded with mixed results for the month of February as government bond yields generally rose and credit markets struggled to make an impact, with relatively limited moves in credit spreads. Overall, risk markets moved little in February after higher volatility in previous months. Most major central banks raised interest rates early in the month, all of which were expected. Inflations continued to slacken, led by softer energy prices. However, certain upward influences such as higher food prices continue to retain the attention of policymakers who remain concerned for the potential of a renewed uptick in inflation data.

In Europe, the European Central Bank (ECB) increased interest rates by 50bp in early February taking the benchmark rate to 3.0%, a 15-year high. ECB President Christine Lagarde reiterated the hawkish stance of eurozone policymakers by saying a further 50bp increase is planned for the March meeting. Headline inflation fell back in January, though the core measure edged higher. The Bank of England also hiked rates by 50 basis points and accompanied by a dovish statement. In the US, the Federal Reserve increased official rates once more, as was widely expected, but policymakers opted to hike by just 25bp, which might signal a deceleration in monetary tightening.

While recent improvements in inflation may pave the way for a softer approach, meeting minutes showed the Federal Open Market Committee believes risks to inflation remain skewed to the upside and that it would not consider lowering rates “until inflation is clearly on a path to 2%.” Feb members, including Chair Powell, pushed a potential “higher for longer” narrative following strong US economic data.

The Advance International Fixed Interest Multi Blend Fund outperformed the benchmark by 16bps during the month of January. Relative manager performance was positive over the month, with WAM, PIMCO and Standish all outperforming the benchmark, whilst Wellington delivered negative excess return. Standish outperformed the benchmark marginally, with most of the alpha attributable to active positioning in Emerging Market local rates, US Agency Mortgages and corporate credit markets.

Active positioning in developed market rates and European sovereign debt markets detracted. PIMCO delivered positive excess returns with the contributors being a long exposure to securitized credit and an overweight exposure to financial corporates as spreads tightened. An overweight exposure to inflation linked securities and an overweight exposure to covered bonds detracted as inflation expectations eased. Wellington underperformed the benchmark over the month. While the currency strategy contributed, duration and country strategies were negative detractors. Western outperformed the benchmark over the month. An overweight duration in the US, core European and UK contributed strongly as yields fall.

Overweights in investment-grade and high-yield corporate bonds also added to returns. Government bonds strengthened as yields declined in most major markets in January. Most larger central banks did not hold rate-setting meetings during the month, resulting in no changes to interest rate policy. Inflation, which remained the primary concern of most central banks, generally fell back slightly, though markets continued to anticipate more interest rate increases despite the fragile global economic outlook. Warmer weather in Europe, lower natural gas prices, and China’s reopening added to the optimism.

In Europe, headline eurozone inflation fell back more than expected in January, declining to 9.2% from 10.1%, but core inflation continued to increase. There was no rate-setting meeting of the European Central Bank (ECB) in January but ECB policymakers continued with hawkish rhetoric, calling for rate increases to be continued and for some time.

Minutes from the December meeting showed some members called for a third successive 75bp increase, but the consensus agreed on 50bp. In the UK, the Bank of England (BoE) noted that labour market indicators were loosening, and data indicated sluggish economic activity. In the US, continued hawkish rhetoric emanating from the Federal Reserve (Fed) led the market to anticipate another, albeit smaller, rate hike in early February. Inflation continued to decline and initial data for GDP growth for Q4 2022 was a little better than had been expected at 2.9%, but still weaker than in Q3.

Forward-looking indicators of economic activity seemed to confirm a softer tone, suggesting that the effects of higher interest rates is being reflected in the real economy. In Federal Open Market Committee’s (FOMC) meeting minutes released earlier in the month, the Fed reiterated their resolve to bring down inflation. The Fed commented that the move from 75 to 50 basis points “was not an indication of any weakening of the committee’s resolve to achieve its pricestability goal”.

Fed officials’ median projections for the appropriate path of interest rates also revealed that none of the Fed officials expect that it will be appropriate to cut interest rates in 2023. This is at odds with market pricing. The US 10-year and 2-year yields decreased by 37 bps and 22 bps to 3.51% and 4.2% respectively. Global credit bonds outperformed in January as spreads tightened, with all sectors outpacing treasuries on a duration-equivalent basis.

Corporate credit posted a strong month, led by the high yield cohort with 218 bps of positive excess returns, while investment grade corporates bested duration-matched Treasuries by 120 bps. Securitized sectors were also positive, led by agency MBS given a reduction in rate volatility, followed by CMBS and ABS. The Bloomberg Barclays Global Aggregate Bond Index returned a positive 2.10% over the month, bringing the one-year performance to -8.94%.

Relative manager performance was positive over the month, with all four managers, Standish, Wellington, PIMCO and WAM, outperforming the benchmark. Standish outperformed the benchmark, with most of the alpha attributed to active positioning in the developed market rates space. Relative underweights in US, German and Canadian duration all contributed. PIMCO also delivered positive excess returns with the contributors being overweight exposures to financial corporate and long exposures towards securitized credit as spreads tightened. Underweight exposure to non-financial investment grade credit however detracted.

Wellington outperformed the benchmark over the month. While the duration, currency and yield curve strategies contributed, country strategies however detracted. Western slightly outperformed the benchmark over the month. The yield-curve positioning, currency positioning, and an underweight to Japanese duration contributed. However, an overweight to US, UK and core European duration and an overweight to US high-yield corporate bonds detracted. Government bond markets were broadly weaker in December and yields ended the month higher, as a result of hawkish central bank announcements, action by the Bank of Japan (BoJ) towards the end of the month and developments in China’s management of Covid. Chinese officials eased several Covid related restrictions, which is expected to see economic activity improve despite new Covid case numbers rising sharply. This combined with signs that inflationary pressures are easing saw risk sentiment improve. The Bank of Japan broadened the tolerance for its yield curve control target band on the 10yr JGB yield from 25bps to 50bps. This leaves the yield curve control now +/- 50bps around 0%. The BoJ messaged this decision around removing yield curve shape distortions and providing more flexibility around achieving their inflation target of 2%. However, the move surprised the market driving yields higher globally as the expectation is now that the BOJ will need to hike rates to curb their rising inflation.

In Europe, European Central Bank (ECB) raised rates by 0.5 percentage points following two previous hikes of 0.75 percentage points, taking the refinancing rate to 2.5% and the deposit facility rate to 2.0%. Previously the ECB had stated that it expected inflation to stay above its mid-term target of 2% for the next three years, while ECB President Christine Lagarde emphasised that rates will rise for some time to come, saying markets could expect “another 50 basis-point rise at our next meeting and possibly at the one after that, and possibly thereafter.” The ECB also said it would begin quantitative tightening beginning in March 2023.

The eurozone experienced its first decline in annual inflation for 2022 in November. In the US, the Federal Reserve (Fed) tightened monetary policy once again in December, taking the Fed Funds rate to 4.25%-4.50%. Fed Chair Jerome Powell had indicated policymakers could moderate the pace of interest rate hikes and the smaller rate hike was widely anticipated. Consumer inflation fell back for the fifth consecutive month, and by more than expected. There was also some modestly positive labour market news as non-farm payrolls data early in the month exceeded market expectations. The Fed lowered its GDP forecast for 2023 and raised its inflation forecast, though the recent fall in inflation has encouraged the hope that the extent and pace of future rate hikes will become more muted. US core CPI fell to its lowest in over a year, and YoY reading for headline CPI came in at +7.1% in November, vs. +7.3% expected. The US 10-year and 2-year yields increased by 27 bps and 12 bps to 3.87% and 4.43% respectively.

Global credit market performance was mixed in December. With rates higher across the yield curve, the broader fixed income market posted negative returns, though credit spreads fell marginally across most sectors. High yield bonds started the month positively on optimism that inflation may be cooling before hawkish Fed rhetoric weighed on the asset class over the latter half of December. Bloomberg US Aggregate Index ended the month down -0.45%. Within the securitized sectors, agency mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities outperformed the duration-equivalent government bonds. The Bloomberg Barclays Global Aggregate Bond Index returned a negative -1.31% over the month, bringing the one-year performance to -12.28%.