- Credit spreads were wider on the month, driven by greater volatility in offshore markets, and bond yields were also higher. These factors detracted from performance
- Coupon income and overlay positioning partially offset these impacts, but the portfolio return for the month was still negative
|Month (%)||Quarter (%)||1 Year (%)||Since Inception* (% p.a.)|
|RBA Cash Rate||0.01||0.03||0.10||0.16|
^ Inception date for DHOF was 1 March 2020. Excess return is measured with reference to net performance. Returns for periods longer than one year are annualised. Past performance is not a reliable indicator of future performance.
DHOF Fund and Investment Objective
DHOF targets an absolute return over time by investing in a diversified portfolio of hybrid securities which offer the best risk adjusted returns available from a global universe of securities.
The aim of DHOF is to provide a steady stream of income over the medium term, by investing in a diversified portfolio fo Australian and global hybrid securities and cash, and to provide a total return (after fees) that exceeds the Benchmark by 3.5%-4.5% measured throughout a market cycle.
- Modified duration: 0.74 years
- Spread duration: 3.28 years
- Running Yield: 3.82%
- Average Credit Quality: BBB
- Portfolio ESG Score: A
- Management Cost: 0.65% + 0.10% pa expense recovery (incl. of GST and RITC)
- Inception Date: 1 March 2020
DHOF delivered a -1.12% return for the month due to widening credit spreads, however duration and overlay exposures provided some positive offset. In particular, spreads moved wider in concert with other risk assets as they responded to inflation concerns and the potential responses to moderate this phenomenon. Volatility was greater in offshore markets such as the United States, where the spectre of higher interest rates looms larger in the near term. Thus, we observed greater variance in spreads from offshore holdings relative to our Australian holdings. From the perspective of issuer fundamentals, we have started to see full year results from many offshore banks, which we expect to ramp up considerably during February. Early results indicate a sector that has largely put the impacts of the pandemic behind it, but earnings are increasingly reliant on more volatile markets and trading income due to a lack of credit demand from households in particular
January 2022 was of course the month that Jerome Powell finally confirmed, as expected, that the FOMC would tighten US monetary policy. History may show that although a change in stance was expected, January was the month that markets started to take the Fed seriously. Bond yields rocketed higher, led by the short end of the US yield curve as the market once again reassessed the number of rate hikes that the US Federal Reserve will need to administer before this tightening cycle concludes. This bought more pain for those who continue to hold standard 60/40 asset allocations in the belief that a 40% allocation to long duration sovereign bonds will act as a stabiliser to a 60% growth asset allocation. Equities and bond duration both suffered in tandem, and we believe such behaviour will remain a feature in markets for the foreseeable future.
For now, though, it is interesting that ‘buy the dip’ behaviour is still evident in equity markets. Sentiment is weaker, but the capitulation that tends to end equity market downturns is absent. The Ukrainian situation seems not to be on the radar screen of equity investors. Bond markets have calmed down in the latter part of the month as well. Commodities are clearly reacting to the geopolitical backdrop though, particularly in oil where the increase in price over the last 12 months is in fact the biggest 12-month percentage increase in the last 20 years. This is a tax on consumption that should, all else being equal, reduce the need for interest rate hikes.
Of course, however, all else is not equal. Assuming the geopolitical situation does not worsen, the status quo is that: 1) Consumers have saved a lot of income because of the various lockdowns experienced over the last two years; and 2) Supply chains remain under pressure, even before any potential further demand windfall created by these savings. We do not put as much credence in the potential for a large pickup in demand as other market participants and commentators, but we concede upside risks to US growth and inflation may emanate from this source. The bond market seems not to agree, with breakeven inflation remaining under downward pressure. Nonetheless, if this upside risk scenario is realised, inflation will not be bought under control in the US unless financial conditions are made to tighten significantly.
Much is therefore riding on the expected fall in the US fiscal impulse that supports our core view that the US economy will slow this year. Bond market pricing supports this view, in that interest rate hikes as currently priced are (according to break-even inflation rates) expected to bring inflation sustainably lower. The US data may be rolling over even now in response to the slowing fiscal impulse: retail sales, industrial production, empire manufacturing and Richmond Fed manufacturing were all weaker in January. Still, we remain wary of upside risks that would send bond yields even higher, led by real yields.
What is interesting is that although risk assets are clearly at risk if the geopolitical backdrop worsens, they are also at risk if it does not. Upside risks to growth increase the urgency that financial conditions tighten to rein in inflation. Slower data point to a potential stagflationary scenario. 2022 is certainly shaping up as a challenging year for markets.
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Past performance is not a reliable indicator of future performance. Please read the PDS prior to investing. This information is general in nature and is subject to the terms and conditions outlined here.