In September the Income fund returned +0.65%, slightly behind the benchmark return of +0.7%. For the quarter ended September the fund rose +1.9%, in line with the benchmark which also increased by +1.9%. 

The month’s most notable development was the surprisingly weak NZ GDP result. Surveys had forecast a modest –0.3% for the June quarter, but the actual figure was –0.9%. This prompted many economists at major banks to call for 3 more additional OCR cuts to a level of 2.25% - half of its level a year earlier (5.5%). The expectations of easier monetary policy drove short-term interest rates lower, driving bond prices higher. 

The highlights of the month were positions that benefitted from these lower interest rates. Corporate bonds such as those issued by TR Group, Auckland Airport and Kiwibank all rose between 1.4% and 1.5% for the month, supported by lower yields.  

Another highlight was the maturity of one of our best recent investments: a position in Italian bank Intesa Sanpaolo. This bond had delivered strong returns following the collapse of Credit Suisse in 2023. The due diligence we carried out at the time gave us conviction that Intesa’s dominant national franchise provided a solid fundamental base, which ultimately translated into robust returns for bondholders.  

As of September 30, the current yield of the fund stood at 4.2%, 1.9% lower than the year prior (5.9%). While the decline in interest rates has supported fund performance, particularly through positions like Intesa Sanpaolo, it also presents a headwind for future returns as the lower starting yield reduces the fund’s income-generating potential.