The Income Fund performed strongly in November, achieving a +1.8% return. This was ahead of its benchmark due to higher weights in offshore bonds with longer maturities which outperformed.

A notable decrease in inflation indicators was the catalyst for this rally, as future interest rate expectations fell, particularly for terms 5 years and longer. This shift fuelled market optimism for a gradual economic slowdown or ‘soft landing’ which was especially beneficial for corporate bond returns.

Domestically, the Reserve Bank of New Zealand had a more tempered view, signalling the potential for another Official Cash Rate hike if inflation indicators did not come down further. Seemingly, this is in response to some consumer demand indicators remaining strong, which suggests a more uncertain path for short term interest rates in New Zealand.

This month’s highlights were the fund’s long-maturity corporate bond investments. Bonds such as those issued by Charter Communications (maturing in 2031) and NatWest Group (maturing in 2030) performed well, delivering returns over +6%.

Netflix was another highlight as Moody’s upgraded their credit rating for the second time this year. The upgrade reflects the impressive speed at which Netflix has grown cash flow while reducing net debt. We expect further upgrades in the years to come.

Golden Goose was also a highlight, reporting strong Q3 results which showed continued revenue growth in a weakening luxury goods market. Rumours also surfaced that investment banks had been approached to assess the potential for an Initial Public Offering of this privately owned business. This would likely result in a profitable exit of our position, as we expect the bonds to be called ahead of their final maturity.

The underperformers for the month were those bonds with shorter maturity dates. As these bonds near maturity, they are less impacted by interest rate fluctuations. This attribute has been generally advantageous throughout 2023, as interest rate expectations have risen. But in November this was a headwind.

The fund's performance this month highlights the importance that higher initial yields can have on performance as positive absolute returns were achieved despite some headwinds from rising offshore yields.