Bendigo Growth Index (STL0034AU) Report & Performance

Returns for the December quarter were strong in absolute terms but lagged the Benchmark across the risk profiles as risk sentiment improved over the period. The Funds are underweight growth assets relative to the benchmark given the Team’s outlook for economic growth. Markets began pricing a higher probability of a lower terminal cash rate in the US following the November inflation print that surprised to the downside. This buoyed risk appetite as lower terminal rates are positive for valuations. However, the team remains cautious on the outlook for earnings and valuations remain elevated which has the Team more cautious on recent market optimism. Despite the rally, global equities finished the calendar year 18.1% lower. The Funds are well diversified and are positioned for a range of outcomes as central banks try to engineer a soft landing in their pursuit of reducing inflation.

Returns for the quarter ending September were negative in absolute terms but were stronger than the benchmark for all 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 as forward indicators of growth soften and interest rate differentials grow making the greenback appealing to investors seeking higher yields.

Returns for the quarter ending June were negative in absolute terms given all assets except cash returned in the red. However, the Funds outperformed their relative benchmarks over the period. The Funds are significantly underweight growth exposures which have benefitted benchmark and peer relative returns. This has been a challenging environment for asset managers given rising bond yields have put downward pressure on all asset valuations. Under these conditions the team have taken advantage of higher yielding defensive assets in the Funds which will add to core income and within growth exposures have pivoted to assets with greater earnings certainty such as infrastructure.

Economic
For the quarter ended June 30, financial markets’ focus shifted from expectations of rising inflation to hawkish Central Bank policy and its potential to slow economic growth and inflation. Inflation continues to remain elevated and has broadened out to the services and core components of CPI. As a result, the policy response has been aggressive to bring supply/demand imbalances back to normal levels over time and asset valuations have been impacted 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 equities on 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 3 times since February opting to raise the cash rate by 75 basis points in June alone. A hike of this size has not been seen in over 25 years indicating the committee’s strong intent bring inflation down. The Fed dot plot, a survey of Fed members which is used to express forward expectations of the cash rate, shows no signs of slowing the pace of rate hikes either with the most recent dot plot indicating a federal funds target rate of 3.40% by year end which would mark 340 basis points of rate rises in calendar year 2022.

In Australia, the Reserve Bank has taken a similar stance in its attempt to bring inflation down locally. Year over year inflation is expected to grow to 7% by the end of 2022 which could mark the highest level of inflation since 1990. Current annual headline inflation sits at 5.1% in Australia. At time of writing, the market is pricing a terminal cash rate north of 3% which is expected to put borrowers under financial pressure as mortgage rates continue their ascent as cost of funding increases. The period ahead is shaping up to be one of further complexity as central banks try to walk a fine line between reducing inflation without significantly slowing economic growth.

After fees and expenses, the portfolio return of -2.55% (gross of fees return of -2.53%) in April outperformed the benchmark return of -2.97% by 42bps. At the end of April, the Fund’s equity weight was -1.7% underweight relative to the benchmark as we further reduced our directional equity risk and made various tactical adjustments to our relative value trades over the month.

We retained our regional preference for UK which we took partial profits on and increased our Australian equity position to overweight. In addition, we entered an underweight to US equities and further reduced our exposure to European equities at the end of the month. We maintained our relative value trades such as long European banks versus European equities and US equal weight versus US equities. We maintained our sector preference for healthcare, financials, agriculture and energy equities while maintaining our long position in commodities and gold.

Returns for the period fell short of the Morningstar peer group. Driving the relative return was the lack of exposure to unlisted investments such as private equity, unlisted property, infrastructure and private credit. Given the index, low-cost nature of the Funds, unlisted investments are not currently invested in. Unlisted investments adopt less frequent valuations and hence they are not subject to short term market volatility.

Over the quarter we increased weights to Australian equities and global infrastructure, given the favourable dynamics for these asset classes. We have also reduced global credit exposure through our defensive sleeve due to our perception that credit spreads will move outwards.

Returns for the period fell short of the Morningstar peer group. Driving the relative return was the lack of exposure to unlisted investments such as private equity, unlisted property, infrastructure and private credit. Given the index, low cost nature of the Funds, unlisted investments are not currently invested in. Unlisted investments adopt less frequent valuations and hence they are not subject to short term market volatility such as the events of January. Over the month active tilts away from interest rate sensitive investments such as fixed government bonds and exposures to gold both benefited the Funds.