The fund rose +1.0% during September, ahead of the benchmark which rose +0.9%. This continues a string of solid performance for the fund which is up +4.2% over the last three months.

For the Income Fund, the key event during September was the cut to interest rates in the US by the Federal Reserve, where they reduced interest rates by 0.50% from 5.50% to 5.00%. This marked the first cut by the ‘Fed’ for this interest rate cycle, joining the Reserve Bank of New Zealand who began cutting rates in August.

Globally, markets are now expecting interest rates to fall a further 1%-2% as inflation pressures continue to subside. In New Zealand the market is pricing an OCR of about 3% by this time next year – substantially lower than the current 5.25% rate. This reflects expectations that both inflation and economic activity will remain subdued over the next 12 months. Looking at economic data points during September, it is hard to argue with that assessment.

Highlights for the month included bonds issued by Netflix, TR Group and Nationwide Bank. These bonds all have maturity dates which are in 2028 or longer which helped to amplify the returns from lower interest rates (also called ‘duration’). This helped to drive returns of +1.5% to +2.0% during the month.

Another highlight for the month was Synlait after the company was successful in passing a shareholder resolution, paving the way for capital injections from majority shareholder Bright Dairy and major customer (and shareholder) A2 Milk. This money has been earmarked for debt reduction, including the bonds we own.

Lowlights for the month were limited to those bonds with very short-dated maturities and those with floating rates (where coupons change with interest rate changes). Bonds include those from banks such as National Australia Bank and ANZ Bank. Returns were positive for the month, but lagged the fund return with performance of +0.5% to +0.6%.