Bendigo Conservative Wholesale (STL0012AU) Report & Performance

Returns for the December quarter were positive across the risk profiles as risk assets had astrong rally to end the year. Markets began pricing a higher probability of a lower terminalcash rate in the US following the November inflation print that surprised to the downside. Thirdquarter US earnings were also better than expected which buoyed sentiment. Year over yearearnings were boosted by the energy and industrial sectors with gains outstripping declines inother industries. Australian shares recorded an impressive 9.1% return in the 3-month periodending December on the back of improved sentiment and anticipation of China planning toease its Covid restrictions. Active management contribution was mixed. Tactical exposures toEnergy benefitted the Funds. International equity manager Antipodes also aided performance.On the negative side of the ledger, Australian equity managers lagged the benchmark index.

Returns for the quarter ending September were negative in absolute terms but were stronger than the benchmark for most risk profiles. The investment team holds underweight exposures to growth assets relative to benchmark given the elevated volatility associated with high inflation and rising cash rates. This has benefitted Fund returns with equities and property underperforming overweight exposures such as Australian investment grade credit, alternatives, and cash over the 3-month period. The Team remains cautious on interest rate linked investments such as duration (bonds and high price multiple equities) and property. A low hedge ratio to the US dollar has also benefitted the Funds given the currency’s recent strength. Active managers DNR Capital and Janus Henderson both positively contributed to performance in the September quarter. DNR’s overweight to materials boosted relative returns while Janus continues to deliver above benchmark credit income and capital gains through high quality security selection with a focus on improved compensation for risk given rising yields.

Returns for the quarter ending June were negative in absolute terms given all assets exceptcash returned in the red. However, the Funds outperformed their relative benchmarks over theperiod. The Funds are significantly underweight growth exposures which have benefittedbenchmark and peer relative returns. This has been a challenging environment for assetmanagers given rising bond yields have put downward pressure on all asset valuations. Underthese conditions the team have taken advantage of higher yielding defensive assets in theFunds which will add to core income and within growth exposures have pivoted to equitysectors with greater earnings certainty such as consumer staples, healthcare, andinfrastructure. Active manager performance has been mixed. Pleasingly, defensive equityexposures such as AB Managed Vol and Antipodes Global Fund have outperformed theirrespective benchmarks over the period.

For the quarter ended June 30, financial markets’ focus shifted from expectations of risinginflation to hawkish Central Bank policy and its potential to slow economic growth andinflation. Inflation continues to remain elevated and has broadened out to the services andcore components of CPI. As a result, the policy response has been aggressive to bringsupply/demand imbalances back to normal levels over time and asset valuations have beenimpacted due to rising discount rates. Asset returns have been poor for the 3-month period,Australian equities, as measured by the ASX 200 Index, returned -12.4%, and global equitieson a currency hedged basis returned -15.1%, as measured by the MSCI World Index.

In the United States, the Federal Reserve has aggressively raised the federal funds rate 3times since February opting to raise the cash rate by 75 basis points in June alone. A hike ofthis size has not been seen in over 25 years indicating the committee’s strong intent bringinflation down. The Fed dot plot, a survey of Fed members which is used to express forwardexpectations of the cash rate, shows no signs of slowing the pace of rate hikes either withthe most recent dot plot indicating a federal funds target rate of 3.40% by year end whichwould mark 340 basis points of rate rises in calendar year 2022

The majority of risk profile funds underperformed the Morningstar peer group over the period, falling short of our expectations. Leading to the result was the on-aggregate under performance of our Australian and global equity managers. The Funds have held tactical positions in inflation linked bonds, gold, energy and cash, all of which aided given their inflation hedge dynamics. However, the underperformance from the Funds growth equity managers and the lack of protection from our defensive equity managers, led to on-aggregate low returns.

The past quarter has seen a large divergence from the type of investments that worked well over the past decade, with resources now outperforming technology companies. Over the quarter we have acted to down weight underlying managers that we believe are not adapting to the changing environment and introduced several new exposures such as healthcare, consumer staples, energy and increased weights to gold and defensive equity managers in AB Managed Volatility.

The majority of risk profile funds underperformed the Morningstar peer group over the period, falling short of our expectations. Leading to the result was the on aggregate under performance of our Australian and global equity managers. The Funds have held tactical positions in inflation linked bonds, gold, energy and cash, all of which aided given their inflation hedge dynamics. However, the underperformance from the Funds growth equity managers and the lack of protection from our defensive equity managers, led to on aggregate low returns. Moving forward, the Funds have increased exposure to defensive equity managers and continue to hold exposures in energy, gold, inflation linked bonds and global commodities.

The majority of risk profiles underperformed the Morningstar peer group over the period. Driving the relative return was the underperformance on aggregate of our active equity managers. Over the past six months the market rotated away from high growth companies, and has rewarded cyclical companies such as financials, commodities and energy, in which these sectors benefit from rising inflation.

Aiding performance was the Funds active tilt towards global financials, held through an exchange traded fund. Further benefiting the Fund was the exposure to Ausbil Global Natural resources which has performed well relative to the broader Australian and global equity markets. The Funds have also benefited from a low exposure to fixed government bonds with the inclusion of Metrics Private Credit and investment in Janus Henderson Diversified Credit.