Macquarie Income Opportunities (MAQ0277AU) Report & Performance

The Fund outperformed the benchmark over July, with credit positioning continuing its recent positive performance contributions. The Fund’s duration positioning also added value, with the Fund’s short positioning in Japan, as well as shorter end curve positioning globally (particularly short end AUD bonds), performing well despite overall benchmark global yields finishing the month higher. Amongst credit sectors, investment grade was a key contributor, as were emerging markets holdings, due to tighter spreads in all risk markets. Amongst individual issuers, Australian and global financials were amongst the largest contributors (Morgan Stanley, Westpac and NAB, amongst others), as the global banking sector rebounded strongly after lagging for several months. Amongst underperformers, AT&T modestly detracted, as reports of lead sheathing on some of the company’s legacy wireline network added uncertainty to the picture – we remain very comfortable with the long-term fundamentals of the issuer.

The Fund made small changes to credit exposure over the month, trimming emerging markets exposure and some specific credits as spreads approached 1-year tights. Additionally, the Fund added to shorter-dated global financials amidst new issuance and specific opportunities to maintain yield in an ongoing uncertain environment. The Fund also added credit downside protection via options, which we believe provides low-cost and positive-asymmetric protection for the portfolio, in the case of a meaningful sell-off in the coming months. The Fund also added to Agency MBS securities, with spreads on these sectors remaining at the upper end of historical ranges, which continue to offer attractive yields with very strong fundamental credit quality. We continue to expect opportunities to add to credit positions over time – but at higher spread levels, given the likelihood of economic weakness in the medium term.

The Fund underperformed the benchmark in May, driven by duration positioning. Credit positioning added value, even as credit spreads widened modestly. The Fund maintained an approximately 3-year duration position over the month, weighted to US denominated rates.

Bond yields globally sold off with lingering inflation, continued healing in financial markets after the turbulence in March, and some specific concerns around the US debt ceiling. Overall, 10-year Treasury yields rose by over 20bps for the month, and Australian 10-year bonds performed worse, rising by over 25bps. Credit positioning added value chiefly through protective option positions – these were removed mid-month amidst a weak market backdrop, locking in gains. Security selection within investment grade (IG) corporates and Emerging Markets also contributed positively.

The Fund made small changes to credit exposures during the month, adding exposure in European and Australian new issuance, with elevated overall spreads and some deals offering attractive concessions. The Fund added Australian utility Ausnet Services, and European insurer Allianz – all high-quality issuers with new bonds sold during the month. The Fund removed some high yield (HY) credit hedges in the first weeks of the month, with spreads at year-to-date wides (excluding the brief spell of volatility during March), banking profits as those positions were put in place at much tighter spreads in February. The Fund also further added to the US Agency Residential Mortgage-Backed Securities (which had begun from an initially zero base in late April): an asset class that had performed very poorly through 2022 and early 2023, and that now offers historically wide spreads. We continue to expect opportunities to add to credit positions over time – but at higher spread levels, given the likelihood of economic weakness or recession later this year. The Fund added modestly to duration mid-month, reflecting higher yields and our ongoing belief that bond yields at these levels reflect strong long-term value.

The Fund outperformed the benchmark in April, with both duration and credit positioning modestly contributing. This was reflective of smaller moves in both credit and bond markets month-on-month, despite still overall elevated volatility. USD duration positioning was a positive contributor, offset by Australian duration positioning, as the relative spread widened between these two markets. Amongst credit sectors, investment grade (IG) was the largest positive contributor, reflecting continued excess running yield. Most other credit segments provided very small impacts either way. Financials were the strongest sector performer this month, reflecting some rebound in overall sentiment, especially amongst larger US and Australian exposures, while higher beta emerging markets allocations (such as Egypt) were small detractors.

The Fund made modest adjustments to credit exposures during the month, slightly reducing exposure to European and US IG credit. Spreads in this sector, particularly outside financials, recovered much of their March weakness. As such, re-assessing credits such as Honeywell (a high-quality US industrial, but trading at one-year tights) and Celanese (a BBB- US chemical producer, also near one-year tights) was appropriate. The Fund also added downside protection in credit derivatives, to offer some offset if broad market weakness were to resume. The cost of option hedging, in particular, has fallen sharply as implied volatilities have reduced after the March volatility. The outlook continues to be uncertain and likely to be volatile. We continue to expect opportunities to add to credit positions over time, but at higher spread levels, given the likelihood of economic weakness or recession later this year. The Fund remains positioned with significant liquidity to take advantage of opportunities as they arise. We believe markets will continue to be volatile as we navigate the challenges of bringing inflation down, while trying to avoid overtightening policy. The Fund’s credit exposures overall are heavily weighted to IG, with small emerging markets and very modest high yield holdings. We think that best reflects the environment ahead and look forward to opportunities to add to higher beta sectors.

The Fund underperformed the benchmark over the month, with renewed pressure on global interest rates the key driver of the underperformance. The Fund’s credit positioning added value, with global investment grade credit and Australian Residential MortgageBacked Securities the key drivers of that contribution. Strong data releases in the US and Europe (as well as evidence of a deceleration in inflation improvement) impacted bond markets: in the US, for example, the peak rate Federal Reserve (Fed) rate priced by the market rose from 4.90%, to 5.41%, and long duration bonds followed suit. The Fund’s duration is weighted to Australia, and Australian duration materially outperformed global moves (yields rose less), though still rose overall. Credit markets overall were mixed, but the Fund’s positioning in higher quality credit added value: positioning in financials was key, which again outperformed the broader market.

Amongst individual credits, Australian and bank exposures were key positive contributors, as subordinated debt in the local market continued to perform well. US investment grade (IG) credit exposures were a detractor, with holdings of JP Morgan and Valero, a US refiner, giving up a portion of their recent impressive gains.

The Fund trimmed some higher beta European credits during the month (including a real estate investment trust (REIT) and a crossover rated industrial issuer) after strong performance. European credit still offers a spread pickup versus other global markets, but the rebound has been significant – with structural energy and inflation problems still lingering. The Fund also trimmed exposures to longer dated Australian corporates after significant spread tightening. Offsetting this, the Fund added short dated exposures in Australian banks and mortgage-backed securities, to maintain income in a lower volatility sector of the market.

The Fund added to duration positions over the month as yields renewed their sell-off: the Fund added short dated Australian duration, underscoring our view that short rates in Australia are attractive, and that the impact of the Reserve Bank of Australia rate hikes is beginning to have a slowing impact on the economy.

We continue to view the moves in bond markets as offering opportunities to add to both credit and duration positions over time – but at higher yield levels, particularly in credit, where spreads are now inside long-term averages and are not realistically discounting the possibility of economic weakness or recession later this year. The Fund remains positioned with significant liquidity to take advantage of opportunities – we believe markets will continue to be volatile as we navigate the challenges of bringing inflation down, while trying to avoid overtightening policy. The Fund’s credit exposures overall are heavily weighted to investment grade, with small emerging markets and very modest high yield holdings. We think that best reflects the environment looking ahead and look forward to opportunities to add to higher beta sectors.

The Fund underperformed the benchmark over the month, with detraction from duration positioning offsetting positive credit contributions. Fixed income markets finished the year mixed: high quality credit spreads were modestly tighter, but government bond yields were higher in the final weeks of the year after the Bank of Japan (BoJ) adjusted their yield curve control settings, against an illiquid market backdrop. The Fund’s overweight position in AUD duration detracted, though this was offset by a short position in Japanese bonds, intended to offset the impact of this kind of unexpected adjustment from the BoJ. Credit positioning added value: investment grade credit benefitted from tighter spreads and increases in allocations made over the last several months, and emerging markets were also positive. The largest industry sector contributions were from financials, transportation, and capital goods.

Key individual names contributing to the credit result again included major financial issuers, such as bonds issued by US banks Morgan Stanley, as well as subordinated debt from Australian major banks. Fundamentally strong issuers (such as Holcim and Honeywell) denominated in EUR also added to the result, as that market continued to move back from the extreme wides reached in mid-October. Underperformers included Aroundtown, a European REIT, and Warner Bros Discovery: hit by continued elevated integration costs as the issuer moves to get the costs of its streaming content down to an appropriate level.

The Fund generally maintained its credit positioning over the month, adding small exposures in shorter dated bonds offering attractive yields, but less exposed to credit spread and bond market volatility. The Fund’s duration position was trimmed during the month after a rally in yields, mostly in the US. We continue to view the moves in bond markets as offering opportunities to add to both credit and duration positions over time – but at higher yield levels, particularly in credit, where spreads are now only at long term averages despite the more difficult economic outlook. The Fund remains positioned with significant liquidity to take advantage of opportunities – we believe markets will continue to be volatile as we navigate the challenges of bringing inflation down, while trying to avoid a material growth slowdown. The Fund’s credit exposures overall are heavily weighted to investment grade, with small emerging markets and very modest high yield holdings. We think that best reflects the environment looking ahead and look forward to opportunities to add to higher beta sectors.

The Fund outperformed the benchmark over the month, with positive contributions from both duration and credit positioning. A better than expected US consumer price index print was a trigger for significant repricing across markets, which benefited positioning. Amongst credit sectors, emerging markets and investment grade credit were the strongest contributors: investment grade credit spreads were the best (volatility-adjusted) sector across global markets, and are the largest weight in the Fund – a position that has been added to over previous quarters. Duration positioning also added value, with global developed market bond markets rallying sharply. Holdings of AUD and USD interest rate duration strongly contributed to the month’s result.

Key individual names contributing to the credit result included senior bonds issued by US banks Morgan Stanley, Bank of America, and JP Morgan, which had widened consistently all year and had been gradually added to the Fund, reflecting our view that fundamentals in this sector were very strong, and the spread widening was more technical in nature. Recent additions in Euro also strongly contributed: the focus had been adding names less impacted by Europe’s slowing economy, but that had been dragged wider by the broader market. Additions in Euro-denominated bonds issued by PPG (US-based industrial coatings) and Allianz (insurance), are two examples. Underperformers included a small number of high yield holdings, such as Occidental Petroleum – the high yield market rebounded early, but had a much more mixed November. The high yield sector is only a small allocation, given our view that spreads here do not compensate for the uncertain environment.

The Fund made small further additions to investment grade credit in the first half of the month but paused buying and moved to small position trims into the end of the month, reflecting tighter spreads and lower new issuance concessions. No material changes were made to duration positions over the month. The Fund remains positioned with significant liquidity to take advantage of opportunities – we believe markets will continue to be volatile as we navigate the challenges of bringing inflation down, while trying to avoid a material growth slowdown. The Fund’s credit exposures overall are heavily weighted to investment grade, with small emerging markets and very modest high yield holdings. This positioning reflects our outlook for the environment ahead.