The Income Fund was flat in January, returning 0.0%, ahead of the benchmark which was down -0.1%. The main driver behind this negative benchmark return was a relatively large rise in short term interest rates (the 2-year swap rate rose by 0.22% to 3.15%).

This shift was largely driven by a change in expectations for the OCR. After 3.25% of cuts, the OCR is now at the bottom of its range (at 2.25%). Expectations for a recovery are increasing, with early signs of improvement across inflation, business confidence and employment. January saw an acceleration in these expectations, such that hikes for the OCR in 2026 are now being priced in.

Despite this headwind, the fund’s diversification to offshore interest rate markets (Australia, Europe, the United States), as well as its exposure to corporate bonds helped to bolster returns.

Highlights included floating rate bonds such as those issued by Scentre Group (owner and operator of Westfield Malls). These floating rate bonds adjust their coupon payments higher when interest rates rise, and as such will benefit from higher income going forward.

Likewise, our positions with non-bank lenders such as Avanti and MTF also benefit from floating rate payments, with coupons calculated at a premium to underlying short term rates. These lenders are seeing solid performance in their loan books as their prudent lending terms have seen arrears (loans subject to repayment difficulties) well within expected levels.

Lowlights for January were those bonds with fixed rate coupons where the rise in short term yields impacted short term returns. Bonds from high quality issuers such as ASB Bank and Westpac saw the capital value of their bonds fall as yields rose. In the case of ASB, these notes now yield 4.3% rather than 4.1%, so the fund will benefit from higher income going forward.